At the request Of NYPD, the original ratification deadline of November 30, 1991 had already been extended by one year. Now, political pressures from environmental groups in the United States, along with reduced demand forecasts for Northeast U. S. Power needs, were causing New York State officials to consider terminating the deal. For Hydro-Quebec, cancellation of the contract would have a severe impact on the economics of the project named after the Great Whale River, a major waterway in northern Quebec.
Managers at Hydro-Quebec realized that as a government-owned utility, a decision to halt development could also have far- caching effects on Cubeb’s economy, as well as adversely influence the province’s economic leverage in ongoing Canadian constitutional talks. A decision to proceed would carry its own economic risks, namely whether the massive amounts of electricity generated could be sold at a price that would cover both fixed and variable costs.
In addressing the trade-offs, managers at Hydro-Quebec realized that fixed costs were influenced in part by the nature and extent of concessions offered to expedite construction. How to proceed was anything but clear. Hydro-Quebec And James Bay Hydro-Quebec was created in 1944 by the Quebec parliament as a overspent-owned utility. Under its charter of incorporation, Hydro-Cubeb’s mandate was to provide energy to industrial and commercial enterprises as well as to Quebec citizens through municipal distributors.
With the backing of the province, Hydro-Quebec took control over essentially all electrical generation in the province, thereby streamlining production, eliminating redundancies, and encouraging the development of new sources of power generation. Copyright 0 1993 Thunderbird, The American Graduate School of International Management and The University Of Western Ontario. All rights reserved. This case was prepared by Professor Allen J. Morrison and Delve Nitric for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.
Certain identifying information may have been disguised to protect confidentiality. Partial funding was provided by the Canadian Public Relations Society. In the late sass, Hydro-Quebec officials became increasingly convinced of the huge potential of the province’s northern regions for hydroelectric power generation. Shaped by ice-age glaciers, northern Quebec was covered with thousands of lakes and fast running rivers. Advocates of counterclaiming the hydroelectric potential of the region argued that every day millions of potential kilowatt-hours of electrical energy flowed out to sea.
The energy potential from the James Bay region of the province was regarded as particularly high. If fully developed, estimates of power generation from the James Bay region topped 30,000 megawatts (MM) at peak production. Set against this generating potential was the growing demand for electricity in Quebec and the Northeast United States. Throughout the sass, Quebec and Northeast U. S. Electrical energy demand was predicted to rise at an average annual rate of Over 7%. The forecast growth for the 1984 to 1 993 period was considerably less at 2. % for the U. S. And 3. 1 % for Canada. However, even this more modest rate of growth would require huge increases in generating capacity over the next decade. The cost and pollution associated with coal and oil-fired generators, together with the growing opposition to nuclear power, convinced Hydro-Quebec officials that demand for cost-effective and clean hydroelectric power would remain buoyant for the foreseeable future. On July 14, 1 971, the James Bay Development Corporation (JOBS) was organized by the Government of Quebec.
Scab’s initial capitalization of $100 million was underwritten by the Province of Quebec. Hydro-Quebec held 51% of Scab’s shares and was given authority to begin development work on a 150,000 square mile region east of James Bay. On December 21, 1 972, James Bay Energy Corporation BUBS) was established to complement JOBS. This new organization was capitalized with SCUD 1 billion, 70% of which was underwritten by Hydro-Quebec. With large sums of capital at their disposal, engineers planned to dam a number of major rivers, flooding much of the 1 50,000 square mile area.
The region affected was enormous-? equivalent in size to the entire Northeast United States, including New York, New Jersey, Pennsylvania, and all of New England. The area lay to the east of James Bay, at the south end of Hudson Bay, extending almost to Labrador. The southern boundary of the project was the 49th parallel-? approximately the latitude of Paris, France, and just north of Seattle, Washington. The 55th parallel marked the project’s northern border-? the latitude of Copenhagen, Denmark, or the tip of the Alaska Peninsula. The annual temperature in this rugged region averaged slightly below freezing.
Because the only means Of access to most Of the region was by chartered float planes, the area remained isolated from population centers hundreds of miles farther south. Only a handful of non- aboriginal Canadians had ever lived in or even visited the region. Appendix A presents a general overview of the geography of the region. Opposition from Native Groups The announcement of extensive development plans for the James Bay region caught many aboriginal people by surprise. Approximately 10,000 native Cree Indians and 5,000 Intuit inhabited the area.
To these groups, the extensive loading that would result from the project spelled the destruction of the habitat for wildlife such as moose, caribou, beaver, 2 owls, geese, and a variety of fish, including salmon and arctic char. The majority of aboriginals earned at least part of their livelihoods from hunting and fishing and not surprisingly worried that the James Bay project represented a serious threat to their way of life. Both the Intuit and Cree had been in the James Bay region long before European explorers first arrived in the sixteenth century.
Since first interacting with settlers, the aboriginals’relationship with them had always been strained. Despite assurances from generations of first European and later North American governments that their culture would be protected, the economic potential of resource-rich northern Quebec led to increasing industrialization of the region. By the early sass, mines, pulp mills, and other restrictiveness industries established operations in what had been native hunting areas in northern Quebec.
This was often done, especially in the early days, with little or no regard for the fate of either the natural environment or the lives of aboriginals. While the Cree and Intuit had different base languages and nearly lived apart, they shared many similarities in their lifestyles and cultures. Both groups shared a reverence for the land and a value system centered around the family unit, with no real central authority. Individually, both the Cree and Intuit were often described as non-assertive and reluctant to become involved in theoretician’s.
Most native beliefs were alien to the predominant North American culture which emphasized self-gerrymandering and material consumption. Aboriginal people felt a reverence for nature’s gifts and believed that animals and other elements of their natural environment should be treated with respect and dignity. While the Cree and Intuit acknowledged the abstract principle of land ownership, hunters used land belonging to someone else as frequently as their own with boundaries between areas typically loosely defined.
To most native hunters it was not so much geographic boundaries but animal movements that determined where one should place trap lines or catch fish. When forced to live under transplanted European laws and customs, many aboriginal people underwent changes to their lifestyles that frequently resulted in social problems for their communities. The transition from being self-sufficient hunters to wage- earners was difficult Accusations of racial prejudice and exploitation of native workers were frequent.
Native Cree and Intuit often complained that they were the last hired for the worst jobs and that they would be the first let go in the event of a layoff. The results of these and other social difficulties had contributed to high rates of alcoholism, drug abuse, suicide, and crime in native populations. Citing these problems, native leaders began in the late 1 sass to increasingly reject the notion of cultural assimilation as unworkable and unconscionable.
Not surprisingly, Hydro-Cubeb’s initiatives to develop James Bay led to legal challenges on the grounds that the rights of the aboriginal people to the land had not been considered. Native leaders sought to put a halt to the entire project, on the basis of a 1912 legal statute which they argued affirmed their exclusive rights over the entire James Bay region. Through the ensuing legal process, Cree and Intuit concerns came to be taken seriously by Hydro Quebec. In November 1 975, an agreement was successfully negotiated between both aboriginal groups and the federal government.
The resulting James Bay and Northern AAA-97-0020 3 Quebec Agreement (CABANA) provided formal reserves for both groups-? 2,000 square miles for the Intuit and 3,250 square miles for the Cree-? as well as exclusive hunting, fishing and trapping rights over an additional 25,000 and 35,000 square miles respectively (see Exhibit 2). In addition, both groups received cash compensation in the amount of $225 million (approximately $1 8,750 per person) over 20 years, and a voice in future environmental assessments relating to James Bay development.
As part of the CABANA, the government of Quebec also extended to Cree and Intuit groups limited self- overspent authority related to the administration of social services and education. The Growth of Hydro-Quebec With an agreement signed with native groups, the development of James Bay proceeded at a rapid pace. After securing additional debt financing primarily through the bond market, the first power plant of what became known as James Bay Phase I began operating in 1979. Located on the La Grandee River, the two turbines of LEG provided 666 megawatts of power for transmission to customers in Quebec, New York, and New England.
Two more massive stations were completed in 1985 bringing an end to James Bay Phase I. Total generating capacity for phase I was approximately 1 0,000 Maws. In 1 991, Hydro-Cubeb’s total installed capacity, including both its hydroelectric and thermal generating plants, was approximately 26,800 MM. By the end of 1 991 , Hydro-Cubeb’s assets had grown to $41. 85 billion, making it the twelfth largest utility company in the world. Of these assets, approximately 59. 40 billion was represented by psychotherapeutics.
It was estimated that heavy borrowing made the utility one of the single largest holders of U. S. Denominated debt in the industrialized world. In the spring of 992, Standard and poor rated the utility a AAA- credit risk. Despite a relatively heavy debt load, the utility remained highly profitable. In 1991, revenues were $6. 28 billion and profits were $760 million, an increase in profits of 88. 1% over 1990. Of the five hundred largest global service companies ranked by Fortune, Hydro-Quebec was rated number fourteen in terms of return on revenues.
The utility employed 20,000 people directly, with thousands more employed in related construction, investment, and support industries. It was estimated that direct and indirect employment related to Hydro-Quebec totaled over 80,000, or about 2% of Cubeb’s work force. Financial statements for the utility are reported in Appendix B. Critics argued that Hydro-Cubeb’s high profitability was, at least in part, a function of lucrative contracts the utility was able to negotiate with power companies in the U. S.
Hydro-Cubeb’s rate structure had recently led to controversy when it was reported through leaks in the Quebec press that the NYPD was paying four times the rate for electricity imports than some magnesium and aluminum smelters in the province were charged and about twice the rate that Quebec consumers were paying. Hydro-Quebec argued that it was simply using competitive pricing to entice businesses into remote and underdeveloped regions of the province, not unlike tax concessions and other inducements offered to companies elsewhere.
It also pointed out that contracts signed with heavy power users in the province were often risk- sharing contracts under which the price per kilowatt-hour was pegged to the price Of the user’s end product (usually on the commodity markets). The 4 utility argued that to criticize the system at a time when commodity prices happened to be very low was misleading and politically motivated. At the same time, some economists accused Hydro-Quebec of using low domestic electricity rates to artificially inflate demand for electricity in the province thereby justifying further grandiose expansion plans.
Despite these negative points of view, Hydrophobic was still a leader in North America in terms of providing competitive rates for residential users, as shown in Exhibit 1. EXHIBIT 1 Average Cost for Residential Consumers for 1 Kilowatts Consumption per Month, sales Tax Excluded, 1991 Role of Hydro-Quebec in Quebec Nationalism Source: Hydro-Quebec 1991, Annual Report. Montreal New York Boston Toronto Vancouver $54. 81 144. 58 114. 73 77. 55 56. 5 Critics of Hydro-Cubeb’s ambitious expansion plans looked beyond economics to find political motives in the development of James Bay. While legally independent from the provincial government, Hydro-Quebec was often accused of being a tool of the government. The relationship was clearly encouraged by the location of the provincial Premier’s Montreal office which was inside Hydro-Cubeb’s headquarters building. To the critics of Hydro- Quebec, James Bay served a pivotal role in Cubeb’s broader plans for greater economic and political independence from the rest of Canada.
Since Canada’s creation in 1 867, Quebec stood apart from other provinces, not only for the predominant use of the French language, but also for its unique legal system, distinct culture, and separate educational system that focused much more explicitly on language and religious issues. Maintaining Cubeb’s uniqueness in the face of an ever-shrinking population was the principal concern of a rising group of Quebec nationalists. They saw Cubeb’s French heritage being increasingly overwhelmed by the predominantly English-speaking majority in Canada.
In 1 976, the apart Quabecomes was elected to govern the province on a littoral which many felt was explicitly separatist. Once in power, substantial changes were made to provincial legislation governing language and education laws with the objective of promoting the use of French in all facets of life in Quebec. While a referendum in Quebec supporting total independence from English Canada failed, many in Quebec remained suspicious of the other provinces and contemptuous of federal institutions.
Deeply worried about the impact Of Quebec nationalism on national unity, the federal government throughout much of the sass and 1 sass moved to make membership in the Canadian federation as attractive as possible for Quibblers. National policies promoting bilingualism were passed, substantial grants were offered to the people of Quebec as well as the Quebec government, and massive new programs were begun to provide regulatory and monetary support for culturally sensitive industries.
While to a degree willing to placate Quibblers, many Anglophones in the rest of Canada viewed such largesse with disdain. 5 In the early sass, Quebec separatism was again in the forefront in the wake of a failed attempt to bring the province into a revised constitutional framework with the rest of the country. The Emcee Lake Accord, drafted in 986 by Canadian Prime Minister Brian Maloney would have provided official recognition of Cubeb’s special status within the Confederation.
However, its ratification in 1 990 was blocked by some of the provincial premiers as well as by native groups who worried that a new constitution would result in their disenfranchisement. The failure of Emcee Lake once again made secession an attractive option to many Quibblers. Although in early 1 992 the future status of Quebec in Canada remained uncertain, a healthy Hydro-Quebec was certain to strengthen Premier Robert Brouhaha’s hand in renewed constitutional discussions. Low cost electrical energy was a powerful tool in attracting industry, promoting exports and sustaining the economy.
A strong, export-oriented economy would add credibility to threats for separation that could translate into concessions from the federal government and other provinces. If accommodation could not be reached and separation resulted, then Hydro-Quebec would play a critical role in the industrial policy Of the new country. James Bay II: The Development of Great Whale In March 1989, Hydro-Quebec announced plans to begin the second phase of the James Bay hydroelectric development project. At this point in time, approximately 30% of the total hydroelectric energy potential of James Bay had been developed.
James Bay II was designed to exploit the generating capacity of three additional river systems in the region: the La Grandee and the Grandee Beeline (Great Whale) rivers as well as the Nondiscriminatory- Rupert (N.B.) system. The headwaters of these rivers were between 800 and 1200 feet above sea level and flowed through a system of lakes and minor rivers to the Hudson Bay basin. The plan was to develop these systems sequentially with the first Stage harnessing the Grandee Beeline (Great Whale) river. Great Whale’s total generating capacity was estimated at 3, 168 MM or about 12% of Hydro-Cubeb’s total capacity in 1 991.
Plans for the Great Whale complex called for the construction of five dams and 126 dikes, creating four reservoirs used to feed three generating stations. Five rivers were to be diverted, 400 square miles of wilderness flooded, and 4,200 acres of forest removed to make room for 400 miles of roads and two small airstrips. A major independent association of Quebec engineers estimated that approximately 1. 5% of the land habitats of the region would be directly affected as a result of Great Whale. Hydro-Quebec engineers estimated that only 0. 16% of land habitats would actually be flooded.
The total cost for Great Whale was estimated at $13. 1 billion. Construction was originally slated to begin in 1 991, with completion scheduled for 1999. Supporters of the development argued that by 1 998, Quebec would face an energy deficit if no new sources of electricity were developed. Shortly after announcing plans to begin work on Great Whale, Hydro-Quebec and the NYPD signed a contract worth $17 billion committing 1,000 MM of generating capacity to NYPD for 21 years. Under the terms of the agreement, he contract was to be ratified 6 by November 30, 1 991 with exports beginning in 1995.
Despite the enormous size of the deal, Hydro-Quebec estimated that growing provincial demand for electricity would account for at least 90% of the utility total output over the duration of the NYPD contract Total electricity exports from Quebec had been less than of production over the past several years, with about half that amount going to the U. S. , and the rest to neighboring provinces in Canada. At the end of 1 991 , Hydro Quebec had interconnections with neighboring systems that gave it the capacity to export 2,675 MM to New
York, 2,300 MM to New England, and 2,512 MM to the Canadian provinces of Ontario and New Brunswick. Not all of this capacity was used and because of shared transmission installations, Hydrosphere’s total simultaneous export capacity was limited to 6,337 MM. By committing the equivalent of 30% of Great Whale’s capacity to NYPD, Hydrophobic would not only add to its U. S. – denominated revenue, but would see its profitability potentially rise. By the year 2000, it was estimated that Hydro-Cubeb’s total export commitments, including NY PA, would represent 7. 5% of revenues and 28% of profits.
Cash low and the security associated with a NYPD contract would enable Hydro Quebec to service much of the massive debt it would have to sell to finance construction. By locking in these revenues, Hydro-Quebec would also enhance investor confidence in its other bond issues, keeping interest and underwriting expenses at a minimum. Concerns of the Aboriginal People Already uncomfortable with the disruptions brought about by James Bay l, the aboriginal people in the region worried that massive additional changes to the landscape would irreversibly affect the complex interrelationships of flora and fauna in the area.
A related concern was that the flooding of areas not currently under water would release bacteria that would transform the abundant but innocuous mercury in the rocks into deadly methyl mercury, a known toxin that causes disease and death in humans. Among other ecological effects, caribou calving grounds would be shifted, James Bays beluga whale populations threatened, and the habitats of many other species altered in unpredictable ways.
There was also a possibility that the climate of the region might be changed because of the much increased surface area of the proposed reservoir systems. Evidence from Russia-? where efforts to avert water from the Oral Sea produced an ecological disaster-? showed that environmental engine emerging could go terribly wrong. The Campaign to Beach Great Whale When Hydro-Quebec announced its intention to pursue the Great Whale project, the utility argued that the CABANA gave it authority to proceed without the consent of aboriginal groups.
The Intuit, believing that the project was thus inevitable, argued for additional concessions from the utility. As part of these concessions, the Intuit demanded financial compensation from the Quebec government as well as concurrent talks on native self-government. It was opted that money generated from a new James Bay II settlement would provide a greater degree of independence for the Intuit making full autonomy an attractive option. 7 The actions of Hydro-Quebec provoked a much angrier reaction from the Cree who vowed to fight the Great Whale project on all fronts.
Many Cree leaders wondered how they could ever benefit from Great Whale, arguing that they would lose their hunting and fishing grounds so “that Americans can plug in their flowerbeds. ” Matthew Con-Come, leader of the Grand Council of the Cree, asserted that the Cree might resort to civil disobedience by lying own in front of earth moving equipment to stop the project. In May 1989, a lawsuit was launched by the Cree challenging Cubeb’s right to exclude the federal government from an environmental review of the project.
By bringing the federal government into the equation, the Cree hoped Great Whale would get bogged down in endless delays as the national and provincial governments fought it out over issues of jurisdiction and sovereignty. At the same time, the Cree, with the encouragement of the Intuit, mounted a major public relations campaign designed to raise public awareness about Great Whale’s (and James Bay as a whole) environmental impact. Their often emotional message focused on the negative effects of the project, while claiming that its economic viability was, at best, questionable.
In support of this effort, they retained the world’s largest public-relations firms, Hill & Knowles Inc. For fees reported to have exceeded $230,000, Hill & Knowles helped gather public opinion data, produce videos, and provide media training for Cree leaders. The efforts of the Cree first made headlines when they organized a voyage in a traditional canoe/kayak called Odessa. This trip, begun in March 1 990, culminated with a handful of native leaders paddling into New York City’s arbor on Earth Day, April 22.
The Cree were subsequently invited to make speeches at Cornell, Columbia, and New York University. Immediate grass- roots support for the cause came from environmental groups in the U S. , as well as student activists on campuses throughout the northeast region. The press appeared overwhelmingly sympathetic to the native viewpoint. Negative articles appeared in a wide variety Of publications including Time, the Boston Globe Magazine, and Penthouse. Government officials in Quebec denounced the articles, saying they contained exaggerations, inaccuracies, ND errors.