24 June 2019

Quebec appeals court decision on Churchill Falls contract no win for Newfoundland and Labrador #nlpoli

Media reports, political comments, and pundit opinions are wrong about the decision last week by the Quebec Court of Appeal in a case about the renewal clause of the 1969 Power Contract between Churchill Falls (Labrador) Corporation and Hydro-Quebec.
The Court decision leaves Hydro-Quebec with virtually all of the electricity produced from Churchill Falls and, most importantly, operational control of water flows on the river.  This will have an adverse impact on Muskrat Falls. As a result, CF(L)Co is likely to appeal the decision.

The Quebec Court of Appeal ruled last week that Hydro Quebec retained operational control of electricity production at Churchill Falls. It made a minor change to an earlier decision by the Quebec Superior Court in a decision from 2016.

That’s why Hydro-Quebec issued a statement that it was satisfied with the outcome of the decision.

In other words, English-language media reports and political commentary got it wrong when they claimed “Quebec's top court rules for N.L. in Churchill Falls dispute with Hydro-Québec” (Canadian Press) or “A Victory For NL In Long-Standing Legal Battle With Hydro-Quebec On Upper Churchill” (VOCM).

The English-language reports focused on the idea that Hydro-Quebec could only buy electricity from Churchill Falls up to a maximum each month under the terms of an automatic renewal to the 1969 power contract between Hydro-Quebec and Churchill Falls (Labrador) Corporation.  VOCM went a step further in the mistake department my making it sound like both Hydro-Quebec and Newfoundland and Labrador Hydro could sell electricity from Churchills Falls. 

The clue that something was amiss in the English-language coverage is the statement from Nalcor that said the Quebec Court of Appeal “had ruled substantially in favour” of CF(L)Co on the question of Continuous Energy.

Here’s why.

The Water Management Issue

The case brought by Hydro-Quebec against Churchill Falls (Labrador) Corporation centred on CF(L)Co’s contention that the renewal portion of the 1969 Power Contract limited Hydro-Quebec to a maximum amount of electricity each month.  Beyond that, CF(L)Co would be free to do what it wanted with the rest. For the first 40 years of the contract, Hydro-Quebec was entitled to all the electricity from Churchill Falls except for a block for Twin Falls and a block that CF(L)Co could recall. 

Nalcor had another angle in its interpretation that went beyond the idea it would get some extra electricity to sell. Central to the interpretation was Nalcor’s ability to manage water flows on the river and that leads back to Muskrat Falls.

Water management on the Churchill River has been a problem for Nalcor from the start of Danny Williams’ version of the Lower Churchill project. Great for Hydro-Quebec.  Not so great for two dams farther down river with limited capacity to manage water flows using reservoirs above the hydro-electric generating plants at Gull Island or Muskrat Falls.

For the first 40 years of the 1969 contract, Hydro-Quebec scheduled deliveries from Churchill Falls to suit its own needs.  Nalcor pointed to this water management problem during hearings at the Public Utilities Board and noted that this essentially crippled the Lower Churchill plants.  Since they had only small reservoirs, both Gull Island and Muskrat Falls were dependent on the water flows from Churchill Falls.  If Hydro-Quebec ran the Churchill plant flat-out for 20 days and shuttered it for the final 10 days of any month, the result would be that Gull Island and Muskrat Falls could reliably produce only a fraction of their installed capacity.

As it is, Nalcor only expected Muskrat, with an installed capacity of 824 megawatts, to be able to produce the equivalent of what you would get from a plant with about 560 megawatts capacity.  With Hydro-Quebec able to schedule Churchill Falls to meet its needs, the reliable capacity at Muskrat would be something on the order of 170 MW, according to Nalcor.  That’s not enough to meet the basic commitment to Nova Scotia for its free block of electricity.

Mucking Around

Williams and the Nalcor Gang tried to deal with this issue four ways. 

One of them was a set of appeals to the Quebec energy regulator.  Nalcor lost the appeals but never explained to the people of Newfoundland and Labrador what it was doing with them.  Danny Williams made up a story about their result, accusing the energy regulator of being part of a conspiracy to screw Newfoundland and Labrador.  Nothing was further from the truth.

Nalcor also tried to screw with the 1969 contract by redefining the Nalcor lease for the Lower Churchill to include Churchill Falls.  Hydro-Quebec objected and in 2009, the Williams government was forced to call the House of Assembly into an extraordinary session to amend the water lease legislation for the Lower Churchill.  At the time, Williams was able to distract public attention from the events in the House by attacking Hydro-Quebec for supposedly trying to scuttle the Lower Churchill.  The truth was something else, as SRBP noted at the time:  Churchill Falls reversion fails a second time” and “NL caught screwing with Churchill Falls:  the quotes”. 

At the time of the emergency session of the legislature in 2009,  Danny Williams revealed that he had broken an earlier political promise when he tried to entice Hydro-Quebec to take a one-third equity position in the Lower Churchill with no redress on the Churchill Falls contract.  Kathy Dunderdale told VOCM Open Line’s Randy Simms that she, Williams , and Ed Martin had tried to lure Hydro-Quebec into a deal through the course of five years of secret talks but they failed. Arguably this was another attempt to address the water management issue since as an equity partner, Hydro-Quebec would have a vested interest in ensuring Muskrat Falls operated at optimal capacity. 

The last effort to address the issue was the creation of a water management agreement that would be either negotiated by the parties or imposed by the Public Utilities Board.  As much as Nalcor claimed the water management agreement the PUB put in place in 2010 fixed the problem for Muskrat Falls, the truth is – once again – something other than what Nalcor claimed.  Since the WMA expressly protected Hydro-Quebec’s contracts with CF(L)Co precedence from the WMA, Hydro-Quebec’s control of water on the river remained intact.  Nalcor has no ability to run water through Churchill Falls to feed the lower part of the river if that would interfere with Hydro-Quebec’s existing rights.

The Quebec Court Decisions

The Quebec Superior Court ruled on the Hydro-Quebec case in August 2016.  Among other things, it decided that: 
  • Hydro-Québec has the exclusive right to purchase all available power and all energy produced at the Upper Churchill Facility,” 
  • “the rights granted to Hydro-Québec under section 4.1.1 of the renewed Contract, including its right to program and plan power and energy, are in no way limited, circumscribed or restricted, on a monthly basis, to the purchase of blocks subject to a ceiling the amount of which would be established on the basis of the notion of 'Continuous Energy'provided for in the renewed Contract," and 
  • Hydro-Québec is not obliged to limit its requests for energy delivery to blocks subject to a monthly ceiling whose quantity would be established based on the notion of "Continuous Energy" provided for in the renewed Contract.”

Basically, the renewal period would look precisely like the initial 40 years of the contract.  From Nalcor’s standpoint, Muskrat Falls was not likely to produce what Nalcor needed it to produce.

Thursday’s decision from the Court of Appeal changed the Superior Court’s decision in a very small way.  Hydro-Quebec doesn’t have the right to purchase all the electricity produced at Churchill Falls except for the TwinCo and Recall blocks.  It has a maximum amount, determined annually.

But that doesn’t mean CF(L)Co can do what it wants with the rest.

The Hydro-Quebec amount is set annually, not monthly as Nalcor wanted. Hydro-Québec also has the right, always, to the power defined by the expression Firm Capacity as well as all additional power which, in CF(L)Co’s opinion, is available. From November to March, Hydro-Quebec also gets all additional power already available to Hydro-Québec ensured under the Guaranteed Winter Availability Contract (GWAC).

What that means in practice is that CF(L)Co may have access to as little as $25 million worth of electricity. Given that the determination of Hydro-Quebec’s entitlement is made annually, there’s no indication of when this might be available to CF(L)Co. 

The more important issue, though, is water management and that effectively remains with Hydro-Quebec.  Hydro-Quebec still has “the rights conferred … under sections 4.1.1 (Operational Flexibility) and 5.3 (Firm Capacity Schedules) of Schedule III to the May 12, 1969 contract provide it with an operational flexibility very similar to the operational flexibility it enjoyed since the commissioning of the Upper Churchill plant, including its right to schedule and plan its energy and power requirements and to postpone (or accelerate) the delivery of energy from one month to another, the whole without being limited to a quantitative cap established pursuant to the concept of Continuous Energy on a monthly basis.”

And just to make sure everyone is clear about how little of this works in Nalcor’s favour, there is the following express limitation on CF(L)Co, the corporation that owns and operates Churchill Falls.  CF(L)Co is owned two-thirds by Newfoundland and Labrador Hydro and one third by Hydro-Quebec.

Until “August 31, 2041, CF(L)Co cannot sell to a third party, or use for the benefit of a third party, including Newfoundland and Labrador Hydro (“NLH”), any quantity of power whatsoever, with the exception of the power associated with the “Recapture” (300 MW) and “TwinCo” (225 MW) blocks, and, since September 1, 2016, the power associated with the energy produced by the Upper Churchill plant over and above the value of the Annual Energy Base, regardless of whether such sales, or use, are made on a firm or interruptible basis.”

In other words, CF(L)Co may wind up with some electricity it can sell every now and then on the spot market, but it cannot commit to delivering any amount of power or energy (electricity) from Churchill Falls on a regular basis.

Next Stop: the Supreme Court of Canada

So little about last week’s decision helps Nalcor one can only assume the folks who wrote the initial English-language media stories either didn’t understand the decision and the issues or they got help with it from Nalcor.

Premier Dwight Ball almost certainly got background notes from Nalcor, which explains why he made such rosy statements about a decision that clearly does nothing to improve Nalcor’s position at Churchill Falls or Muskrat Falls. Nalcor has such a well-earned reputation for making deceptive statements about Churchill Falls and the Lower Churchill that it’s easy to see the corporation’s fingerprints on the words that came out of Ball’s mouth.

Don’t be surprised if CF(L)Co appeals this decision to the Supreme Court of Canada.  It’s the only logical step since the decision does not help Nalcor in any meaningful way.