05 November 2012

The Mystical Lords of Mu’skr’at Fa’alls #nlpoli

The water management controversy flared briefly at the end of last week thanks to Geoff Meeker’s blog at the Telegram and a couple of interviews by the 2041 Group and Nalcor’s Gil Bennett.

This is one of those issues where a lot of people either tune out early on because it appears highly technical and complicated.  Actually it isn’t.  The topic only appears complicated.

It only appears complicated because of the very convoluted, long-winded, and very unhelpful way the cats at Nalcor talk about the water management agreement.  They go all techie.

Once you get a handle on the whole water management thing, it’s quite easy to understand and it’s quite easy to see where the possible problems are.

Right off the bat let’s put one huge part of last week’s controversy to one side. That’s the part from Meeker’s blog post where he credits the Halifax media with digging out what the local media didn’t.  That set off more than a few sensors in local media circles, as you might expect.  True or false, though, the performance of the local media doesn’t matter if you are merely trying to get a handle on Muskrat Falls and water management.

The only thing about that part of Geoff’s post that is relevant is the bit about the veto comment itself.  Gil Bennett is pretty clearly talking about the ability of the Hydro-Quebec directors on the Churchill Falls (Labrador) Corporation board to veto an agreement by CFLCo in some circumstances.  That actually doesn’t matter in a talk about the water management agreement since it has been legally imposed and CFLCo is bound by it regardless.

The Problem the WMA is Supposed to Fix

Over the past few days, Muskrat Falls proponents have started to talk about something they call the Muskrat Falls reservoir.  Let’s get this clear from the beginning:  Muskrat Falls doesn’t have a reservoir except for a relatively small bit of water that it holds back at the site. 

That’s a big problem.  In Nalcor’s application to the public utilities board filed in 2009, the company describes exactly how big a problem it is.  They don’t talk about Muskrat Falls specifically.  At the time Nalcor was still planning to build Gull Island first and use it entirely for export.  They changed the project objective in 2010 but that’s another issue.

Gull Island is a rather graphic example of the water flow problem.  You can find the following bits of information in the section of Volume 1 of the application about pre-filed evidence.

On paper, Gull Island would have 2250 megawatts of generating capability installed.  In practice, Nalcor considers the plant will be capable of producing 12 terawatt hours of electricity with the water management agreement in place.

A bit of quick math.  There are 8760 hours in a year.  If you run a 2250 MW plant every hour, all year you produce 8760 hours X 2250 megawatt  or 19.7 terawatt hours.  A terawatt is bigger than a megawatt:  using TWh instead of MWh just cuts down on the number of zeroes you type.

Anyway, note that with the WMA in place Nalcor expects to get about eight TWh of electricity less from Gull Island than its installed capacity would suggest.  The difference is water flow.

But if the WMA functioning would still leave Gull Island almost 40% short of theoretical maximum capacity, then the water issue must be enormous.

Skip down to page 13 and 14 of the pre-filed evidence and you can see how enormous the water management problem is.  Nalcor describes a month in which Churchill Falls runs virtually flat out for 20 days of the month and then goes down to a very small output for the last 11 days.

Under average conditions, the resulting production at Gull Island would be 1,519 MW for the first 20 days and 443 MW during the last 11 days of March. During a dry period, this scenario would require production levels of 1,471 MW during the first 20 days of March, and 395 MW during the last 11 days. Consequently, without a water management
agreement, Nalcor would be limited to approximately 400 MW of continuous delivery in a long‐term power purchase agreement for Gull Island. Such an arbitrary constraint on lower Churchill delivery schedules is unnecessary and is incompatible with the concept of the efficient use of the resource. [Emphasis added]

2250 MW installed but capable of producing only 400 MW reliably. That’s only about 17%.  If you had the same situation at Muskrat Falls,  the 826 MW of generation would spit out – reliably – the equivalent of only about 140 MW.

The Virtual Reservoir

The water management agreement fixes this problem by creating a virtual reservoir for Muskrat Falls.  Nalcor will run Muskrat Falls for parts of the year and deliver the electricity to CFLCo and its customers, mainly Hydro-Quebec.  That will allow Nalcor to gain credit for water that becomes part of its bank in the term used by the WMA. 

The reservoir doesn’t really exist, of course, except in the records of the water management co-ordinator, a position the WMA creates.  He or she will track the water in the “bank”.  That includes the water flows in and the water flows out. 

As long as there is water in the bank, Nalcor can use it.  When Nalcor needs water to fill in one of those low-flow parts of the month, they can draw down the amount stored in the bank. 

Nalcor doesn’t have to do anything to lose water from its bank, either.  If there’s a spill for any reason, the co-ordinator will deduct Nalcor’s water first, regardless of the reason for the spill.

A Modest Thing Indeed

Once you get beyond all the chatter, the water management agreement for the Churchill River is a modest thing indeed.  Nalcor doesn’t get anything special as a result. 

For  example, Nalcor don’t get access to water in the Smallwood Reservoir as if it was Nalcor’s.  Nalcor only gets to control the water it actively “stores” as a result of supplying electricity free of charge to CFLCO and, by extension, to Hydro-Quebec.

The 2041 Group Issue

The water management agreement establishes clearly that the agreement cannot interfere with earlier contracts CFLCo has with Hydro-Quebec and with the Twin Falls Power Corporation.   Bern Coffey has been leading the 2041 Group efforts on the water management issue.

As the Telegram reported, Coffey is concerned that “without Hydro-Québec’s consent, Nalcor has no right to ‘store water’ in the Churchill Falls reservoir if such storage would ‘adversely affect’ Hydro-Québec’s contractual rights.”

As well,

“Nalcor’s media release omits any reference to the contractual right given Hydro-Québec by the second sentence in subsection 6.4 of the Hydro-Québec power contract (and subsection 5.2 of the renewed power contract), which sentence reads, ‘In addition whenever additional capacity can, in the opinion of CFLCo, be made available, such capacity shall also be available to Hydro-Québec on request,’” Coffey said.

In other words, if water storage results in additional capacity at Churchill Falls, Hydro-Quebec can claim it.

Nalcor’s response  - indeed their stock response to every criticism - is that there is no issue or problem.  The critics just don’t understand. In some cases it takes huge numbers of words for Nalcor officials to say that, sometimes without actually addressing the criticism in detail, accurately.  But boil it all down and that’s their response:  no problem and the critic just doesn’t understand.

Their last word in a release issued ostensibly in reply to Coffey was a paraphrase of what the secret agents told Indiana Jones at the end of Raiders:  top men are working on it.

“At the end of the day, Nalcor had two sets of law firms working its side of the agreement, Churchill Falls had two sets of lawyers. ... We are all very comfortable with the water management agreement.”

Nalcor officials have never succinctly and accurately described what the WMA is supposed to do, by the way.  They have instead relied on comments that  the “water management agreement between Nalcor Energy and Churchill Falls defines how the two companies manage the flow of water on the upper and lower Churchill River to optimize and maximize output of the river.”

Nothing in the actual agreement says that, however.  Nor is that what the deal actually does. 

But it is Nalcor’s reply.

What?  No Law Suit?

Some people  - such as CBC’s David Cochrane - have asked why Hydro-Quebec hadn’t filed any lawsuits yet.  After all, the suggestion goes, if the 2041 Group criticism was valid there’d be a lawsuit from Hydro-Quebec.

Well, not really.

For starters, until Muskrat Falls exists and Nalcor and CFLCO actually implement the WMA, there isn’t an issue.  Hydro-Quebec would have a hard time making a case based essentially on theory at this point.

Note that when they did have a concrete issue in 2009 over an effort by the provincial government to rejig the 1961 lease, they forced the provincial government to hold an unprecedented emergency session of the legislature. Now some aspects of that period have never been reported at all in Newfoundland and Labrador, never mind reported completely.  The background to the emergency session wasn’t fully explored either.  The public just got the provincial government’s explanation along with their anti-Quebec tirades, followed by their unsubstantiated claims about exporting electricity and a decision by the Quebec energy regulator.

But that’s another issue.

More importantly in this case, though, Hydro-Quebec isn’t the one likely to find a problem.  You see, anyone who actually reads the WMA can see quite plainly that Hydro-Quebec’s interests  - particularly the 1969 power contract - are protected expressly and unquestionably by the WMA and by changes made in 2007 to the province’s Electrical Power Control Act

The WMA and those 2007 amendments not only recognise the validity of the 1969 contract, they expressly subordinate Nalcor’s interest in water management on the Churchill River to the 1969 contract.  Like Kathy Dunderdale’s 2009 admission about five years of secret talks with Hydro-Quebec, that wouldn’t be a very popular aspect of this deal if anyone actually reported it.

So no one – especially Nalcor – talks about it.  

But it is basically the crux of the issue that Coffey is getting at: Nalcor’s interests aren’t secured.

Hydro-Quebec doesn’t have to worry.  Their interests are secure.

To get back to the question about law suits, any problems with the water management agreement will show up when Nalcor tries to use it.  If everything goes as Nalcor predicts, there won’t be any problem.

But what if Nalcor’s “top men” are as accurate about this issue as their other top men were about the estimated cost of the project back when the provincial government told us all about it in 2010?

What happens when Nalcor tries to use its bank only to be faced with the reply that they have no water in the bank or can’t access it because doing so at that moment would adversely affect Hydro-Quebec’s interests?

The problems will show up – if they exist – after the dam is built and long after taxpayers have borrowed like $8.0 billion for a dam than can, as it turns out, only reliably produce 17% of its installed generating capacity.

Nalcor counters that they have had a bunch of very smart people look at it and those very smart people are comfortable that Nalcor’s position is safe. Top men are on it.

Very smart people thought the 1969 contract was great as well and that it had no problems in it. As with the 1969 contract, we won’t find out which smart lawyers -  Nalcor’s Group 2041’s or Hydro-Quebec’s – are right until long after we’ve run up the bill.

Maybe someone should be asking some hard questions and getting some firm assurances.  The mystical top men of Muskrat Falls could be wrong.