Present
The Prime Minister (Mr. Diefenbaker) in the Chair,
The Secretary of State for External Affairs (Mr. Green),
The Minister of Finance (Mr. Fleming),
The Minister of Veterans Affairs (Mr. Brooks),
The Minister of Transport (Mr. Hees),
The Minister of National Defence (Mr. Pearkes),
The Minister of Trade and Commerce (Mr. Churchill),
The Minister of Justice (Mr. Fulton),
The Minister of National Revenue (Mr. Nowlan),
The Minister of Agriculture (Mr. Harkness),
The Minister of Citizenship and Immigration (Mrs. Fairclough),
The Minister of Fisheries (Mr. MacLean),
The Minister of Labour (Mr. Starr),
The Postmaster General (Mr. William Hamilton),
The Minister without Portfolio (Mr. Browne),
The Minister of National Health and Welfare (Mr. Monteith),
The Minister of Northern Affairs and National Resources (Mr. Alvin Hamilton),
The Minister of Defence Production (Mr. O'Hurley),
The Minister of Public Works (Mr. Walker),
The Associate Minister of National Defence (Mr. Sévigny).
The Secretary to the Cabinet (Mr. Bryce),
The Assistant Secretaries the Cabinet (Mr. Martin), (Dr. Hodgson).
. . .

COLUMBIA RIVER NEGOTIATIONS
(Previous reference January 25)

9. The Minister of Northern Affairs and National Resources recalled that negotiations with the United States on the co-operative development of the Columbia River would begin in Ottawa on February 11th. In preparation for them the Cabinet Committee on Columbia River Problems had held several meetings, and the Canada-British Columbia Policy Liaison Committee (including federal and provincial ministers) was to meet on February 9th. It was hoped that agreement could be reached with the province at that time on the basis of the negotiations with the U.S.

The need for negotiations with the U.S. arose from the fact that the Columbia was an international river. Because it flowed in deep valleys with steep sides, the spring run-off was unusually heavy, the peak flow being forty times the minimum flow. Consequently, storage would greatly improve the high power potential. The portion of the Columbia lying in the U.S. had been partly developed but little development had occurred in the Canadian section. The power potential of the Columbia River was 2½ times that of the mainstem of the St. Lawrence River, including the Niagara River.

One of the proposed sequences of development contemplated the diversion of the waters of the Kootenay River into the Columbia to increase the total amount of power. This was expected to be an important issue in the negotiations with the U.S.

Another important point for Canada was the preservation of the right to divert the waters of the Columbia into the Fraser. This diversion was not proposed at this time, partly because it might damage the fisheries on the Fraser, but the right to divert remained significant for the future.

The developed capacity of the Columbia River and its tributaries at this time amounted to 346,000 k.w. in Canada and between 6 and 7 million k.w. in the U.S. If storage were provided in the Canadian section, the power capacity in Canada could be raised by 3 million k.w., and the U.S. would automatically receive 2,044,000 k.w. in incidental benefits known as downstream benefits. The proposal was that Canada and the U.S. should divide these downstream benefits equally, each country taking responsibility for development within its borders. In this way Canada would receive a large amount of power at a cost to the consumer of less than 3.5 mills on the average.

One important problem discussed last autumn with the Province of British Columbia and with the Canadian members of the International Joint Commission was the question of whether the downstream benefits should be shared on a gross or on a net basis. Division on a gross basis meant the assignment of half of the benefits to each country, and the acceptance of responsibility by each country for the costs of development within its borders. Division on a net basis meant the application of benefits first to repay the costs of each country, and the equal division of the benefits then remaining. The standard practice in commercial agreements involving downstream benefits was to share on a net basis when there were no international implications. The I.J.C., however, had unanimously recommended, and both the Cabinet Committee and the province concurred, that the downstream benefits on the Columbia River should be shared on a net basis. There would thus be a minimum involvement of either nation in the affairs of the other; and if the U.S. should succeed in having any low-benefit projects included in the development, the incremental costs would be borne by that country alone.

The Minister proposed in his memorandum that the objective for the Canadian negotiating team should be to obtain at as early a date as possible an agreement with the U.S. that would provide the maximum advantage to Canada that was consistent with obtaining U.S. concurrence. The advantage to Canada should be primarily the optimum return of power in terms of quantity and cost; secondly, it should involve the largest possible return for flood control and other benefits accruing to the U.S. as a result of flow regulation by Canada. The agreement should be for a term certain not exceeding 50 years. It should protect Canada's right to divert water from the Columbia after the period of the agreement and should have regard for Canada's interests in other rivers crossing the international boundary. The negotiations should be based as far as possible on the principles agreed upon by the I.J.C. on December 29th, 1959.¹³⁹

The development of the Columbia River would be one of the largest projects, if not the largest, in the history of Canada. Depending on the scheme of development finally adopted, the total cost of full development in the next 14 to 16 years would probably be of the order of $1.4 to $1.5 billion. Costs would be of three different kinds, for storage, for power generation and for power transmission, each kind involving a cost of roughly $500 million.

The Cabinet Committee had discussed about 15 different sequences of development. The province, the owner of the resource, would probably recommend adoption of Sequence 1A, comprising the High Arrow Lakes and the Mica storage projects. This sequence offered a quick return of low cost power, and low initial capital costs. The cumulative cost of power per kilowatt hour at the end of this sequence would be 3.36 mills, the total amount of hydro power would be 28.376 billion k.w.h., the annual return of power and flood control benefits would be $190.7 million and the annual net benefits would be $95.5 million. About 3,400 people would be displaced by flooding, and this aspect could give rise to serious political difficulty.

The Chairman of the Canadian Section of the I.J.C. and several members of the Cabinet Committee preferred Sequence 7, which included the Low Arrow Lakes project and the diversion of the Kootenay River, as well as Mica. If this sequence were adopted, 27.9 billion k.w.h. of power could be generated at a cumulative cost of 3.28 mills per k.w.h., and the net benefits would be $96.1 million per annum. Only about 1,800 people would be displayed by flooding but the Bull River-Luxor project in this sequence would involve a more serious destruction of resources than Sequence 1A.

The Minister said that the U.S. was expected to press for the inclusion of the Libby Dam on the Kootenay River, and might therefore be expected to oppose diversion of that river. This dam would please certain political groups by providing major public works in Montana. Canada should oppose the inclusion of this project because its benefit-cost ratio was very low, and indeed its inclusion would contravene the principles of the I.J.C. report. The states of Oregon and Washington were seeking to obtain power at the lowest possible cost, and might therefore, be expected to resist the pressure for the Libby Dam. Sequence 10A had been designed to include Libby. This sequence, however, would yield only 22.6 billion k.w.h. of power, the cumulative cost would be 3.54 mills per k.w.h. and the pet benefits would be only $71.9 million per annum. These figures clearly showed the adverse effect of Libby on the whole development.

An explanatory memorandum had been circulated, (Joint memorandum, Mr. A. Hamilton, Mr. Green and Mr. Fulton, Feb. 2, - Cab. Doc. 37/60).?

10. The Minister of Finance said that he believed more study should be devoted to the financial aspects of the proposed development. The Cabinet Committee had suggested that Canada should share equally in the costs of development, and had indicated that this might mean an outlay of $750 million by Canada. He was concerned at the prospect of making such an enormous commitment at a time when the government was trying to reduce borrowings and prevent increases in taxes. Since the investment was to be self-liquidating, little if any financial participation by the Federal government should be needed. The project should have a strong commercial appeal, particularly in a debt-free province. Although he recognized that any financial commitment by Canada would be spread over a number of years, a commitment at this time would have a serious effect upon the public attitude to the federal credit. Agreement to participate on a 50-50 basis would become a dangerous precedent and would almost certainly lead to similar requests from other provinces.

The only valid argument for Federal government participation was the preservation of benefits for Canada by the provision of storage. Most of the other benefits accrued to the province. The investments for power generation and power transmission did not arise from the international aspects of the proposed development. He believed, therefore, that the Federal government's participation should be confined to a share in the costs of storage, and even this would involve a commitment of some $250 million.

The press had reported a member of the Cabinet as having declared that Canada would contribute $500 million to the Columbia, and the Premier of B.C. had written asking for confirmation on this point and enquiring whether the province would be expected to guarantee repayment of the Federal government's investment. He had replied quoting the Speech from the Throne, which made no direct mention of the amount or proportion of the Federal government's contribution.

Mr. Fleming recalled that the Federal government had not contributed to the power aspects of the St. Lawrence Seaway development, although he recognized that the power development would have been impossible if the Federal government had not undertaken the navigation aspect of the Seaway. The Beechwood power project in New Brunswick was not comparable with the Columbia, because in this case the Federal government had given special assistance to a province whose fiscal position was relatively weak.

Federal participation in the Columbia development, other than assistance in the interna¬tional negotiations, would win little or no political credit to the government. The B.C. government would take the credit if a federal contribution were made.

11. The Secretary of State for External Affairs said that the proposal for the co-operative development of the Columbia and the sharing of downstream benefits had first been advanced by General McNaughton. The Conservatives, while in opposition, had been convinced of its desirability and had incorporated it in the national development policy. The Speech from the Throne in 1957 had declared the intention to proceed with joint development of the river's potential.

Five or six years ago the Province of British Columbia had proposed to allow the Kaiser Aluminum Co. to build a dam at the foot of the Arrow Lakes. This would have made impossible the development of the river as a whole. The Federal government of the day had intervened and got Parliament to pass the International River Control Act, which prohibited the damming of international rivers without a license from the Federal government.

The Conservative government had referred to the I.J.C. the question of the best means of determining and apportioning the downstream benefits. The unanimous report represented a triumph for Canada, and had been achieved largely by General McNaughton.

One reason for moving quickly on the Columbia was the fact that the Wenner-Gren interests were promoting a vast project for the development of the north of B.C., including the development of the power potential of the Peace River. The Provincial government had associated itself with this scheme. If it proceeded it might kill the Columbia proposals, because the U.S., being in urgent need of more power, would build a number of dams on the Snake River and elsewhere that were incompatible with an international scheme, and would also build additional thermal plants. Because the Premier of B.C. was committed to the Peace River scheme, his objective was to destroy the Columbia scheme. Negotiations on the Columbia, however, had been successfully brought to a position where the Premier did not dare to repudiate the scheme. In any international agreement Canada would accept certain obligations, and some of these would have to be assumed in turn by B.C. under a dominion-provincial agreement.

12. During the discussion the following points were raised:

(a) If the negotiations were rushed forward and completed before the forthcoming election in B.C., the strength of the Conservative position in the province would be destroyed because votes were rarely given for past benefits. The Conservatives, however, would be in a strong position if they appeared as sponsors of the Columbia development, in opposition to the Peace River development supported by the provincial premier, because only the Columbia offered the prospect of cheap power.

(b) On the other hand, it was stated that delay in negotiations might jeopardize the Columbia development without materially affecting the outcome of the B.C. election. If the international negotiations succeeded, it could be shown that the Conservatives had been the champions of the Columbia scheme. If the negotiations failed, the province would proceed with the Peace River development and thereby gain political kudos. The Canadian bargaining position vis-à-vis the U.S. was strong, because of the impending presidential election in November, but might be much weaker thereafter.

(c) The government had spent large sums for the Trans-Canada Highway in B.C., but had received no public recognition. Participation in the Columbia would merely enable the Provincial government to identify itself with that development and claim the credit.

(d) The Columbia development could be done only by governments, because private enterprise could not negotiate the required international agreement. Furthermore, a private company could not sell the power as cheaply as a public authority.

(e) The power load in B.C. was rising by 8 per cent per annum, and the capacity of the Columbia would be fully used by 1974. By that time additional power, probably from the Peace River, would be needed to keep pace with the demand.

(f) It was important that parliamentary approval for the Columbia be obtained this year. Congressional approval for the Libby Dam had been given a decade ago. If the international arrangement were not proceeded with, the U.S. might be expected to renew its application with the I.J.C. for the construction of Libby.

(g) In the negotiations the province would probably ask the Federal government to provide 75 per cent of the cost of the entire development. Some said that the Federal government should provide 50 per cent of the costs of storage, generation and transmission. The size of the project was beyond the normal capacity of a province. To drive a hard bargain with the province would be to deny the national interest in the development and to enable the province to escape responsibility by saying that it could not finance its share. The Peace River project would be financed entirely by private capital.

(h) Some said that the Federal government's share should not extend to power generation or transmission. The Province of Saskatchewan had asked for a contribution from the Federal government toward the power aspect of the Saskatchewan dam, but this had been refused. Others said that the Federal government should share in transmission costs of the Columbia development. Transmission was included in agreements with the Atlantic provinces, and Manitoba had asked for assistance in financing transmission costs. Eventually, a national power grid should be developed to convey power from energy surplus areas to energy deficit areas of the country, and to reduce the cost of power everywhere in the country. Such a grid would also make possible the transmission of power from northern rivers to areas of peak demand.

(i) One possibility might be to inform the B.C. government that the Federal government was prepared to contribute half the cost of the Mica Dam. This tremendous project was common to all sequences, and would involve a cost of about $320 million. It would take about 6 years to build. On the other hand, a commitment for only one project might arouse the suspicions of the province and might wreck the negotiations. In any case, it would set a financial pattern for the subsequent projects, and therefore, could not really be decided in isolation.

(j) The development of the Columbia would require investments in Canada amounting to $280 million in the first 6 years, $300 million in the next 2 years and another $300 million in the following 2 years. By the end of the sixth year the annual returns would exceed the annual incremental costs, and after 11 years the development would yield an annual net profit of $96 million to Canada. Power might be produced at a cumulative cost of 3½ mills, but might, during the early years, be sold to consumers in B.C. at a higher rate. The actual charge would be a matter for negotiation with the province, but might be at any level between the cost and the existing B.C. power rate of 6½ mills. The Federal government might reasonably ask for a share of any such operating profit in proportion to the ratio of Canada's capital contribution to that of the province, such share to be applied in accelerated repayment of the Federal financing. Canada should also receive interest on its contribution.

(k) The provincial spokesmen were saying that the province must know the extent of aid to be expected from the Federal government before the province would agree to support any programme of development. The negotiators for the Federal government should take the position that, as the resource was provincial, the province should make the initial proposals on February 9th and should indicate whether or not they were asking for financial assistance from the Federal government. Such an approach would be in line with the statement in the Speech from the Throne which indicated that the Federal government would assist if so requested by the province.

13. The Cabinet agreed:

(a) that the Minister of Northern Affairs and National Resources, the Secretary of State for External Affairs and Mr. Fulton, as the Federal government's representatives on the Canada-B.C. Policy Liaison Committee on the Columbia River, should try at the Committee's meeting on February 9th to ascertain the proposals of the Province of British Columbia for joint development, including the sequence of projects and the financial assistance expected by the province;

(b) that the Federal government representatives be authorized to inform the B.C. repre¬sentatives that the Government of Canada is prepared, subject to the approval of Parliament, to consider sharing the costs of the storage necessary to implement the proposed treaty between Canada and the United States for the cooperative development of the Columbia River;

(c) that Cabinet should decide, in the light of the discussion between the federal and pro¬vincial representatives on the Policy Liaison Committee whether it should be stated forthwith that, subject to Parliamentary approval, Canada will pay one half these costs provided:

(i) that financing provided by the Federal government would be repaid with interest from the revenues from power; and

(ii) that, until the federal share had been repaid in full, the Federal government would receive a share of any net revenues obtained by the province from the development, in proportion to the ratio of Canada's capital contribution to that of the province, such share to be applied in accelerated repayment of the federal financing;

(d) that, during the negotiations with B.C., the Federal government's representatives should not offer a contribution greater than that described in (b) above toward storage costs, and should make no offer to contribute toward the cost of power generation or power transmission;

(e) that both the negotiations with B.C. and those with the U.S. be based upon the principles recommended by the International Joint Commission on December 29th, 1959, for the determination and apportionment of benefits derived from cooperative development of the Columbia River; and

(f) that all other questions of policy arising in the negotiations should be referred to the Cabinet for consideration, and any agreements reached should be subject to approval by the Cabinet.

R.B. BRYCE
Secretary to the Cabinet

¹³⁹ Voir/See Volume 26, document 280.