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Upper Churchill Power – The Unexamined Alternative
Upper Churchill – The Unexplored Alternative
A Discussion Paper on Muskrat Falls
Volume I
By:
JM
August 2012
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 1
Part I: Introduction
On February 29th
the author submitted a 173 page written presentation to the Public Utilities Board entitled
“Muskrat Falls – The Benefits of a Phased Development” [Ref. 1] which attempted to provide a plain English
assessment of the of project. Following a critical review of NALCOR’s submission, the presentation concluded with
a recommendation to construct the Labrador Island Link (LIL) per the current project schedule, but to delay the
construction of the Muskrat Falls Generating Facility (MFGF). The reasons for proposing the delay to the MFGF
were simple and remain relevant:
1. A fixed electrical transmission link to the mainland Canada is required to provide long term reliability of
the island energy supply. If the link is not built now, it will likely be built prior to the expiry of the Upper
Churchill Power Contract in 2041. Although the transmission link would still be in excess of 2 billion
dollars, it would represent a legacy from our current offshore prosperity.
2. Immediate completion of the LIL would permit access to the Upper Churchill recall power which is
presently being wheeled through Quebec. Due to the low final sales price, and the transmission tariff
payable to Hydro-Quebec Transenergie, this energy is not providing maximum value to the province.
Redirected to the Island this energy would help meet our domestic needs until the next decade.
3. A delay to the MFGF would allow additional time to confirm the energy demand profile for the island,
including the future of the Corner Brook mill. The variability in the island requirement is a primary risk
associated with the Muskrat Falls project. In their final report Manitoba Hydro were very clear in
concluding that if the Corner Brook mill closed the economic preference for Muskrat Falls would
evaporate [Ref. 33]. A combination of a 25% increase in capital cost and the closure of the Corner Brook
mill would result in the Muskrat Falls option being more expensive than continued oil generation. A
phased development would mitigate this uncertainty.
4. A delay would minimize the overlap in the construction schedule with the other ongoing resource
projects. This would ensure maximum opportunities for Newfoundland workers, and the supply chain. By
completing the MFGF following the Hebron and Husky wellhead platform projects all project costs will be
potentially reduced.
5. A delay to the MFGF would permit the verification of the subsea cable prior to the de-commissioning of
Holyrood thermal facility.
6. It would also allow the Labrador mining energy requirements to be factored into the planning forecast. It
is unclear to the Author how Muskrat Falls can service the Emera block, the Labrador mining potential,
and the expected growth in the island demand. There will be insufficient energy to meet the peak
demands in winter, resulting in a continued reliance on thermal generation. A delay to Muskrat Falls will
allow the full potential of Labrador mining to be known prior to committing 167 MW of peak period
power to Nova Scotia.
7. The Labrador Link would facilitate the option to purchase power from Hydro-Quebec to meet the island
needs. If not from Hydro-Quebec there could be potential purchases from other North American utilities
using the open access provisions of the United States Federal Energy Regulatory Commission (FERC).
With the de-regulation of the North American markets other generation utilities are permitted to transmit
power over the Hydro-Quebec grid subject to a tariff.
It is clear to most pundits that Nalcor’s decision making has been very heavily skewed towards the Muskrat Falls
alternative. The Terms of Reference for the Public Utilities Board was limited by the Government to 2 options
only, namely; (i) Muskrat Falls Infeed and (ii) the Isolation Option premised on continued oil fired thermal
generation. Nalcor’s investigation into other options such as power purchases from outside jurisdictions and
natural gas were qualitative only, with no economic models disclosed for public review. These options were
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 2
essentially screen out by Nalcor at the Decision Gate 1, which was completed in February 2007 [Ref. 34]. This was
before the shale gas revolution currently underway in the United States [Ref. 35].
Therefore, the Author’s recommendation to proceed with the construction of the LIL, with a delayed MFGF, was
qualified on the completion of a full-costed screening assessment, including the following options:
1. Small scale gas pipeline to shore for electricity generation at Holyrood.
2. LNG imports for electricity generation at Holyrood.
3. Construction of the Labrador – Island Link (LIL) to gain access to recall power, combined with small hydro
and limited thermal generation.
4. Construction of the LIL to utilize the recall power with supplemental energy requirements from the Upper
Churchill through a power purchase agreement with Hydro-Quebec.
Following the PUB’s final conclusions [Ref. 22] the government responded appropriately and committed to
completing a cost comparison of the other primary options identified during the PUB hearings, specifically (i) LNG
imports, (ii) gas to shore and (iii) increased wind resources [Ref. 23]. This various reports studying each of these
options will be issued for public review prior to the Fall debate within the House of Assembly and the DG3 project
milestone. However, Government at that time did not commit to further study of potential power purchases from
outside jurisdictions, specifically Upper Churchill power from Hydro-Quebec.
This discussion paper will further examine the alternative of building the LIL to connect the island to the North
American grid, and in doing so gaining access to the recall power presently available. An economic comparison is
presented if the additional energy requirements are met by power purchases from either the Upper Churchill or
other North American utilities at market rates. It must be noted that this is written in the context of “bridging the
gap” to 2041 to when it is assumed that there will be sufficient energy available from the Upper Churchill to meet
our demands for low cost energy. Although the costs of the MFGF and the LIL are reputed to be increasing, the
economic models contained within this essay are based upon the DG2 numbers presented by Nalcor within their
November 2011 submission to the Public Utilities Board.
Part II: The North American Energy Market – A Changing Landscape
As I have noted, the National Energy Board of Canada has ranked the Lower Churchill as the lowest cost source of
hydroelectric power on the North American continent. This, combined with the long term price stability of hydro-
electric power, places a special premium on this power
Brian Tobin, Speech to New England Governors, 1997 [Ref. 2]
It is often quoted that the more something is said the more it is believed. It is fair to say that this can be applied to
the development costs of the Lower Churchill. For the better part of four decades Newfoundlanders have been
indoctrinated with the notion that the Lower Churchill is the lowest cost power within North America. It is a fact
that was not often challenged in the folklore of Newfoundland. For the better part of the last four decades this
may have been true. However, the energy market of North America is in a period of renewal fuelled by the
emergence of shale gas. The conclusions of the NEB should therefore be revalidated.
Whether it is Romaine in Quebec [Ref. 24], or Wuskwatim in Manitoba [Ref. 25] it is not a good time to be building
hydro dams in North America. The reality for the current incarnation of the Lower Churchill Project is that there
are significant challenges. From a cost side, the local resource based economy is booming and the construction
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 3
costs for such a project is relatively expensive, and increasing. This will certainly be one of the reasons how the
government will explain the cost growth between the DG2 and DG3 estimates. Of equal importance the final
export market for any such hydro project is evaporating. Since the financial crisis of 2008 the energy markets
within the target region of the North Eastern United States have contracted, with the energy price presently
trading at 50% of the highs of 2008.
Figure 1 provides a summary of the day ahead pricing for the North East United States. During the early planning
of the Lower Churchill project in 2006-2008 the wholesale electricity costs in the final markets remained quite
robust above the $75/MWhr range. Since this time the steady decline in natural gas prices has resulted in the
mirrored reduction in wholesale electricity rates.
Figure 1: Day Ahead Pricing – All Hours [Ref. 3 – FERC]
The optimist amongst us could view this as a short term market correction, and that electricity prices and natural
gas prices will both escalate to rates seen prior to the financial crisis of 2008. Although the eventual export of LNG
from the United States will cause gas prices to increase, it will not be immediate. This is reflected by US Energy
Information Administration (EIA) who have predicted that wholesale energy prices will remain relatively stable in
the period to 2035 [Ref. 4]. The EIA prediction for energy prices is included in Table 1 for both present day dollars,
and nominal or real escalated costs. It is clear that energy prices are forecasted to have negligible real growth in
the period up to 2035, and that they will be generally less than the peak pricing experienced from 2000-2008.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 4
Table 1: EIA Energy Price Predictions [Ref. 4]
Although Muskrat Falls is intended for domestic needs, the development has to be viewed in the context of the
greater North American marketplace. We can not be blind to the significant reduction in energy prices within the
Northern US which has occurred in the last 5 years. Muskrat Falls, and discussions about the future potential for
Gull Island, must also be filtered through the economic reality of the relatively stable North American energy
market, both present and predicted.
When considering the option to use Upper Churchill power to supply the island market it must also be
remembered that the Labrador power presently being exported by Hydro-Quebec into the United States is pegged
to these ISO-New England and FERC projections. In 2011 Hydro-Quebec received an aggregate of $54/MWhr
compared to $82/MWhr in 2010 [Ref. 5] for energy it exported. This downward trend is expected to continue into
2012.
The reader may argue, as Minister Kennedy has, that Upper Churchill Power is not available and therefore the
North American pricing benchmark should not be considered valid. I will address this in subsequent sections of
this essay. However, for the information of the reader the next section will provide a comparison of energy prices
from the proposed Muskrat Falls project to other markets within the North American jurisdiction. Is the Lower
Churchill the lowest cost undeveloped power within North America? To truly understand if Muskrat Falls
represents the lowest cost alternative we must compare it to using Upper Churchill power which is either
purchased at market rates or obtained by some other means. This was a clear omission from the work Nalcor
submitted to the PUB as part of the Muskrat Falls review [Ref. 34].
Part 3: Muskrat Falls – The Lowest Cost Power in North America?
Within the PUB process Nalcor did provide information concerning the cost of the generation and transmission
components of the project. RFI-KPL-27 Rev. 1 provides the most succinct summary of what the final wholesale
costs would be to the Newfoundland ratepayer [Ref. 6]. Within these calculations Nalcor have included the cost of
the transmission line from the existing Churchill Falls plant to the Muskrat Falls facility within the MFGF
component costs (Page 6 – Column 2). To provide a true comparison to the North American benchmark price the
transmission component should be transferred into the LIL transmission costs (Page 6 – Column 3). Appendix 1
contains a summary of this calculation with the resulting unit cost on a dollars per megawatt hour basis ($/MWhr).
Figure 2 provides a summary of (i) the cost to generate electricity at Muskrat Falls, (ii) the costs to transmit the
energy to the island of Newfoundland and (iii) the total wholesale price to the Newfoundland consumer. It is clear
that within the period to 2035 that the Newfoundland consumer will be paying a premium for Muskrat power
when compared to the EIA projections for wholesale energy in the United States.
Supply, Disposition, Prices, and
Emissions 2010 2015 2020 2025 2030 2035
Growth Rate
(2010-2035)
(2010 cents per kilowatthour)
Generation 5.9 5.6 5.7 6 6.1 6.4 0.30%
Transmission 1 1.1 1.1 1.1 1.1 1.1 0.30%
Distribution 2.9 3 2.8 2.7 2.6 2.6 -0.50%
(nominal cents per kilowatthour)
Generation 5.9 6 6.7 7.7 8.7 10.2 2.20%
Transmission 1 1.2 1.3 1.4 1.6 1.8 2.20%
Distribution 2.9 3.3 3.3 3.4 3.7 4.1 1.40%
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 5
Figure 2: Muskrat Falls Energy Cost Compare to EIA Benchmark
Nalcor are correct when they argue that due to being an isolated island it is not fair to compare us to the
continental United States. This may be true when considering the cost of transmission only. However, there is
presently 5400 MW of generating capacity in Labrador, part of which is being sold through the Hydro-Quebec grid
to the North American market. Therefore, it can be considered entirely reasonable to compare the Muskrat Falls
generating costs to that of the potential export market, and the North American benchmark.
As Figure 2 so effectively communicates Muskrat Falls power will be some 20% more expensive than the EIA
wholesale prediction. This in itself causes the author some concern. But there are several other factors to be
considered:
Figure 2 is based on DG2 cost estimates. It is rumored that the DG3 estimates could be 37% higher, which
would further widen this gap [Ref.19].
Only 40% of Muskrat Fall’s power is used initially. If the growth on the island does not follow the
projections, the cost on a $/MWhr basis will further increase under the take or pay arrangement
proposed by Nalcor. The final incremental cost to the Newfoundland consumer is proportional to the
amount of energy sold on the island. Energy sold to the Labrador mining industry, or the US markets will
not substantially reduce the final rate to the island consumer and will not effectively mitigate the risk.
There is 1400 GWhr of Recall energy which is presently being wheeled through Quebec. The low sales
rate in New England, minus the tariffs payable to Hydro-Quebec, ensures that this energy is not providing
maximum value to the people of Newfoundland and Labrador.
Within the next 10 years until the provincial demand grows there seems to be a clear advantage to using existing
Upper Churchill power, even at market rates, rather than building the Muskrat Falls facility. Although Nalcor have
justified the Muskrat Falls generation project by utilizing a 50 year economic review period our net energy
shortfalls will only be until 2041 when the Upper Churchill Contract expires.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 6
To understand the potential upside with the utilization of Upper Churchill the Author has taken the data presented
within RFI-KPL-27 and reformatted based on the energy being hypothetically available at market rates. General
assumptions in this calculation are as follows:
The LIL transmission costs and the costs for the transmission facilities from Churchill Falls to Muskrat Falls
are as per Nalcor’s DG2 submission.
Recall power is available now until 2041 at a cost of $2.50/MWhr. It should be noted that within Nalcor’s
presentation to the PUB the recall energy is also included within the expansion analysis for the Infeed
option [Ref. 1]. Therefore this assumption is no different than what was assumed by Nalcor.
Upper Churchill power is available at market rates. This is assumed to be $63/MWhr in 2017 and
escalated at 2.5% each year until 2041.
There are 2 options shown for total costs post 2041. The first assumes power is available at
approximately 70% of the market rate, and escalated at 2.5% per year. This reflects joint ownership of
the Churchill Falls facility and an indicative sales rate post 2041. The second option assumes that the
energy is available at $20/MWhr, and escalated at 3% per year. This reflects the potential price under a
“Cost of Service” model should the facility be regulated by the Public Utilities Board.
For option 1 the reader should be reminded that as NLH own 65% of the CF facility they would be entitled
to the same percentage of the profits. The profits realized from the higher sales price would be divested
to the shareholder (Nalcor) through a dividend.
Figure 3 provides a summary of the annual revenue requirements for the following options (i) the Muskrat Falls
plan (ii) LIL + Upper Churchill at market rates and (iii) LIL + Upper Churchill at market rates until 2041 when energy
costs are regulated. This chart clearly indicates that there is a considerable long term saving to the Newfoundland
consumer should Upper Churchill power be available at even market rates. Discounting this annual revenue
requirement over the 50 year period, to 2010 dollars, yield the results provided within Table 2. The results are
provided for a discount rate of 8% which corresponds to Nalcor’s cumulative present worth analysis presented to
the PUB, and for a discount rate of 2.5% which reflects a nominal inflation rate.
These numbers establish that considering the cumulative present worth method the Upper Churchill power
purchase alternative has a ~1 billion dollar advantage compared to Muskrat Falls infeed option. This would be a
3.2 billion dollar advantage compared to the thermal isolated option [Ref. 33]. More importantly in real dollars
(discount rate = inflation rate) the Upper Churchill option would result in a 4.1 billion dollars savings to the
Newfoundland consumer over the 50 year project life. If the Upper Churchill generation was regulated by the PUB
post 2041 these savings would be ~7.2 billion dollars (in 2010 dollars). The use of Upper Churchill power at
market rates clearly represents a lower cost alternative to Muskrat Falls. Any growth between the DG2 and DG3
estimates will only widen this gap.
During the PUB hearings in February a consumer asked (via the consumer advocate) if Nalcor has had negotiations
with Hydro-Quebec concerning purchasing power from their grid. Mr. Gilbert Bennett responded that “As far as
Hydro-Quebec is concerned, no, we have not undertaken detailed negotiations with Hydro-Quebec” [Ref. 26].
Considering the “Power Policy” as defined by the Government of Newfoundland within Section 3b of the Electrical
Power Control Act of 1994 [Ref. 27]:
(b) All sources and facilities for the production, transmission and distribution of power in the province should be managed and operated in a manner
(i) that would result in the most efficient production, transmission and distribution of power,
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 7
(ii) that would result in consumers in the province having equitable access to an adequate supply of power,
(iii) that would result in power being delivered to consumers in the province at the lowest possible cost consistent with reliable service,
The EPCA mandates both the Government and Nalcor to fully explore all avenues to provide the lowest cost power
to the people of the province. This mandate should be extended to review the potential for Upper Churchill to be
used in lieu of Muskrat Falls. The numbers presented in this essay may not be exact, but they do demonstrate the
clear case to further investigate this option. Although power purchases from Hydro-Quebec may not be politically
palatable to the people of the province we must be mature enough to realize that for the next 20 years this could
be the best possible solution to meet our growing electrical needs. Unpopular as it may be, the unexplored Upper
Churchill alternative may be in the best long term interest of the province!
For the remainder of this paper, there will be presentation and discussion of 3 potential mechanisms for importing
power either from the Upper Churchill facility, or other power from the North American Grid. These will include:
1. Request to increase the 300 MW recapture within the 2016 renewal of the 1969 Power Contract.
2. Redirection of power to Newfoundland and Labrador per section 8 of the Electrical Power Control Act
- 1994.
3. Power purchases under the FERC regulation 888 open access provisions. Power could theoretically
be purchased from Hydro-Quebec or some other North American utility and sold to Newfoundland
and Labrador Hydro.
These options have been reviewed in the past. However in the current context of Muskrat Falls, and the upcoming
2016 renewal, there is worth in re-exploring some of these old ideas
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 8
Figure 3: Summary of Annual Revenue Requirements MF versus UC Power Purchase
Table 2: Summary of Total Annual Revenue during 50 year Term (Discounted to 2010 Dollars)
Discount Rate = 2.5% Discount Rate = 8%
Total Delta Total Delta
Muskrat Falls Base Case $17,010,682 $- $4,112,669 $-
Upper Churchill – Market $12,874,318 $4,136,364 $3,150,486 $962,182
Upper Churchill – Regulated $9,774,545 $7,236,137 $2,838,054 $1,274,615
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 9
Part IV: Increased Recapture Allowance – The Sequel
Within the original 1969 Power Contract there was the provision for 300 MW of recall power for the purposes of
meeting provincial consumption within Newfoundland and Labrador. This energy (Some 2300 GWhr) could be
recaptured during the term of the contract for use within Labrador or with the construction of a subsea link in
Newfoundland. Although this represented less than 10% of the total generation of the Upper Churchill plant, it did
practically equal the entire generation of the province in 1966 when the Letter of Intent was signed. As it is
relevant for some of the subsequent discussions, the 300 MW recapture amount was entrenched in the 1966
Letter of Intent between Brinco and Hydro-Quebec. This was the firm amount of power which was requested by
the Province prior to the LOI being signed.
Newfoundland’s future energy needs could potentially be met by adjustment of the recapture amount with
transmission via the Labrador Island Link to Soldiers Pond. This sounds very simple, and it was attempted through
legal means in 1976. John Crosbie, as Minister of Energy within the Frank Moore’s government, sent a letter to
CFLCo requesting a total of 800 MW of power from the Upper Churchill to meet the growing requirements on the
island. This was premised upon the 1961 lease agreement between the Government of Newfoundland and Brinco,
which granted water rights to Brinco but guaranteed access for provincial use. The request from Crosbie is
provided below [Ref 7]:
Although the government was the majority shareholder within CFLCo, they none the less responded to the request
stating that it was not possible [Ref. 7]:
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 10
This exchange of correspondence resulted in a series of court cases in both Quebec and Newfoundland which
ended in two Supreme Court of Canada trials in 1982 and 1988 respectively. The legal proceedings [Ref. 7 – 10]
were largely focused upon the application and interpretation of Clause 2e of the original 1961 lease agreement
[Ref. 11].
Provided that upon request of the Government consumers of electricity in the province shall be given
priority where it is feasible and economic to do to.
The separate court proceedings resulted in the same conclusion, the legality and interpretation of Clause 2e was
largely irrelevant to the case. The Courts ruled against the Government of Newfoundland’s position, as it was
deemed that the 800 MW was in excess of the available power not committed to Hydro-Quebec. Any agreement
by CFLCo, would effectively put it in breach of the 1969 Power Contract. This is summarized most effectively by
the 1985 Newfoundland Court of Appeal [Ref.8]:
The efforts of John Crosbie and the Provincial government in 1976 had failed. To the knowledge of the Author the
revision to the recapture provision of the 1969 Power Contract has not been challenged since then. It is
considered prudent that this option be revisited in the context of the Muskrat Falls development and the
upcoming 2016 automatic renewal of the 1969 Power Contract. The former clearly documents that the additional
recapture would be economic and feasible, where the latter will counter the legal arguments successfully used by
Hydro-Quebec some 30 years ago.
The following is a recap of the primary arguments from each party within the 1983 Goodridge decision [Ref. 7].
For each argument the Author has provided commentary regarding its current applicability.
For the Defense of CFLCo, Hydro-Quebec and Trust
1) It was not feasible and economic and economic to provide 800 MW of power as the request would
effectively put it in Breach of Contract, and in default under the security instruments. The default of the
bonds and financing would ensure that the supply of 800 MW would be unfeasible nor economic, the
fundamental requirement under Clause 2e of the Lease Agreement.
The issue of the securities and Trust Deed was a major theme within the court decision. In simple terms
these were the financing agreements which were entered into by CFLCo to fund the construction of the
Churchill Falls facility. The release of 800 MW of power would have placed CFLCo in potential default of
these financing agreements, which would have reportedly resulted in significant penalties.
In 1980 there was still 30 years of debt repayment, and any default of these terms would have had severe
economic consequence to CFLCo Within their 2010 annual report Nalcor stated that all loans, bonds and
other debts associated with the construction of the Churchill Falls project were retired [Ref 20].
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 11
Nalcor 2010 Annual and Financial Report [Ref. 20]
It could be potentially argued that any such release of 800 MW of power (<15% of total generation) would
now not result in any penalties under the financing agreements. As will be discussed in more detail within
the next section of this essay, the 1969 Power Contract had clear provision for such deficiency in energy
delivery. Therefore it was duly recognized by both signatories to the contract that there may be
interruptions with the supply of energy of this order of magnitude.
2) CLFCo argued that “Government participated in negotiations leading to the execution of the Power
Contract, which contains section 6.6 a provision for recapture of 300 MW. CFLCo alleged that the
government had made known what its future requirements were and according to CFLCo it expressly or
implicitly agreed that it would not request power in excess of this amount. Furthermore it was argued
that the Government exhausted its rights under Clause 2e of the 1961 Lease Agreement.
This was one of the major arguments presented by the Defendants within the 1983 Goodridge decision. It
is one which I agree with in principal. But it must be acknowledged that the original court case did not
appear to link the “Renewal Clause” to the Letter of Intent. For those who are not aware, the original
Power Contract contained a clause that automatically triggered a renewal 25 years following the initial 44
year term. This renewal clause was not expressly defined within the original Letter of Intent in 1966, and
it was in fact one of the last items to be negotiated within the contract.
All Newfoundlanders interested in the Upper Churchill project should review the Jim Feehan and Melvin
Baker paper [Ref. 12] dedicated to the renewal clause. It represents a major piece of work and academic
contribution to the modern politic debate. It does make a passionate and sound argument that the ill-
considered renewal clause is the result of economic duress that Brinco found itself in by the aggressive
negotiating tactics of Hydro-Quebec. In reading this paper, and other documentation, it is apparent that
the 300 MW recapture (as requested by the government) was entrenched within the Letter of Intent
signed on October 13, 1966. However this allocation of 300 MW should be considered in conjunction
with the language used to describe the renewal clause within the Letter of Intent [Ref. 12]:
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 12
It is certain that in the 1966 LOI although the recapture power was limited to 300 MW in the initial term
of the contract, the quantity and price was to be negotiated in good faith prior to any renewal. Following
the signing of the LOI the Government requested that this 300 MW be increased to 500 MW on April 14,
1967. CFLCo replied that it would prove to be a serious obstacle in the final negotiations. However, this
could be considered that the Government did provide notification to Brinco that it did intend to increase
the recapture in the future, the only remaining option to do that would be within the renewal
negotiations. The language within the renewal term in 1967 would permit this increase following the
original 44 year term of the contract in 2016.
Paragraph 515 on page 65 of the Goodridge Proceedings [Ref. 7] indicate that “there are a great number
of examples in the evidence illustrating that the province knew and accepted the proposition that’s its
right under Clause 2e was being limited to 300 MW. It wanted more but ultimately yielded to that figure.
It recognized that the energy could be generated by this amount of power with the balance coming from
the Lower Churchill”.
However it should be investigated whether the body of evidence referenced by Goodridge was prior to
the renewal clause in its final form. As late as February 1968 the renewal clause was consistent with the
LOI.
Furthermore as reported by Feehan / Baker the March 7, 1968 draft contract still had the option for
CFLCo to have a lower amount of power sold to Hydro-Quebec, however the fixed price structure was
agreed. Between this date and the end of April 1968 the negotiations were effectively completed. Part
of these final negotiations was the revision of the renewal clause to its present form.
It is a matter of interest as to the level of disclosure Brinco made to the Newfoundland Government
concerning the change in the renewal provisions. It has been reported by Feehan & Baker that the
Government of Newfoundland were not notified of the changes to the renewal clause until July 1968, via
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 13
a phone call to Premier Smallwood. The conversation about renewal was limited to the fixed costs, and
not necessarily regarding the amount of power obligated within the renewal period.
If CFLCo did not disclose the removal of “agreed quantity and price” from the renewal term to the
Newfoundland Government does this affect one of the primary arguments against the Attorney General
of Newfoundland in the 1983 court case? Is this alone worth revisiting the 1976 efforts by John Crosbie
to recall more energy for provincial consumption?
3) Hydro-Quebec Argued that the Government is not entitled to make any request which would interfere
with the delivery of electrical power by CFLCo to It.
This was one of the primary arguments of Hydro-Quebec in the Newfoundland and Quebec court
proceedings. However, after the completion of the legal challenges the Province of Newfoundland and
Labrador implemented the Electrical Power Control Act in 1994. This legislation was reportedly drafted by
Clyde Wells in the 1980’s and has very direct language that enables the government to redirect power
within the province to meet shortfalls within the electrical system. Consider Section 8.0 of the EPCA-
1994:
There is an argument that this “change in law” would constitute a Force Majeure claim if it was initiated
by the Public Utilities Board. The Force Majeure definition within the 1969 Power Contract is as follows:
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 14
Likewise the Force Majeure definition within the GWAC is as follows:
It is unclear if an EPCA triggered order would constitute a true Force Majeure per either of these
definitions. The EPCA could not be described as “fortuitous” nor could the adoption of EPCA to avoid the
Muskrat Falls investment be considered something which was not avoidable with proper planning and
foresight. I would value legal opinion regarding the applicability of EPCA as a Force Majeure claim,
however it is the opinion of the author that this would be a weak argument at best.
This does not diminish that the EPCA is a law of the land which can’t be ignored by CFLCo and/or its
Directors. CFLCo has an obligation to make best efforts to accommodate any request by the PUB to
redirect power. Therefore in the context of the 1983 court case regarding recapture allowance, there is a
clear law which states the Government of Newfoundland, through the PUB, has the right to request and
obtain power. However, CFLCo and Hydro-Quebec would have to receive fair and reasonable
compensation for this power as per the language contained within the EPCA.
In the absence of a Force Majeure claim, CFLCo would be in breach of contract if they complied with the
request by the PUB to redirect power. Hydro-Quebec would be entitled to the penalties entrenched
within Article VIII of the 1969 Power Contract, or alternatively Article 11 of the GWAC. The penalties and
damages outlined in the respective contracts could potentially be the limit of the financial liability to the
Newfoundland consumer if Article 8 of the EPCA was implemented. As will be described in the next
section, the total damages and penalties could ultimately be a lower cost than Muskrat Falls.
There are several counters to this argument. The first is that the Churchill complex is exempt from the
EPCA [Ref. 28]. The exemption was issued in 2000 to Newfoundland Hydro, which at the time was the
parent company of CFLCo AS CFLCo is now a sister company of Newfoundland and Labrador Hydro, both
under the parent company of Nalcor, is it unclear if this exemption is applicable to the Upper Churchill
plant? If it is exempted, then the 2000 order would have to be repealed by the House of Assembly.
The second counter to this argument is that under Quebec contracts law specific performance may be
invoked in the event of breach [Ref. 29]. Under English law, which is the basis of the Newfoundland legal
system, monetary damages or penalties are the common remedy for breach of contract. Under Quebec
contract law the courts usually enforce the party in breach to actually fulfill their contractual obligation.
As the 1969 Power Contract is under Quebec law, specific performance may be evoked. In this scenario
CFLCo would receive a court order to resume the delivery of energy to Hydro-Quebec. However, there is
an exception under Quebec law where monetary damages may be the remedy for breach when the rule
of law prevents specific performance of the obligation. It could be argued that although the Electrical
Power Control Act is not a law of Quebec, it is the ruling law in the jurisdiction where the contractual
obligation is completed, and as such specific performance would not be the appropriate remedy.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 15
4) Hydro-Quebec had put Government in Strict Proof that there was a requirement for power and that it
was economical and feasible to do so.
With the retirement of the debt obligations of CFLCo, and the clear deficiency penalties and damages
entrenched within both the Power Contract and the Guaranteed Winter Availability Contract, there is a
potential case in 2012 to establish the economic feasibility of Upper Churchill recall and transmission to
the island. I believe this case would stronger if the LIL was committed to and therefore not introduced to
any legal argument.
5) Hydro-Quebec argued in Quebec Proceedings [Ref. 10] that is needed all electrical energy generated by
the harnessing of Churchill Falls to ensure the economic growth in the province of Quebec and to meet
the present and future needs of consumers of energy in that province.
This argument from the 1982 Supreme Court of Canada proceedings is no longer valid. It is clearly
understood that Hydro-Quebec are a net exporter of energy. A part of these exports is the low cost
power from the Upper Churchill.
6) It was argued by Hydro-Quebec that they provided numerous financial considerations and guarantees
which enabled the Upper Churchill project to proceed. None of these considerations would have been
granted if it was not for CFLCo’s firm and unambiguous undertaking to deliver to it all the power and
energy produced by the Churchill Falls Plant.
There were numerous arguments to this effect within the proceedings from the 1982 Supreme Court and
the 1983 Goodridge decisions. Within the term of the original Power Contract I believe it would be
difficult to successfully argue this point. It is clear to any historian that the project would not have
proceeded without the completion guarantee provided by Hydro-Quebec.
In the context of the renewal clause, and following similar argument presented above for the recapture
amount, this argument is not as strong for the period following 2016. Hydro-Quebec had proceeded and
committed to completing the project under the 1966 Letter of Intent with the terms and conditions of the
renewal clause yet to be negotiated. The additional increase in recapture from 300 MW to 800 MW could
have been reasonably foreseen in 1966 as an expected level of growth in provincial demand. As such it
could not be viewed as a fundamental consideration of the Power Contract as entrenched within the LOI.
As was recommended within the author’s February 29th
submission to the PUB there is certainly a case to review
the original legal effort to recall additional power from the Upper Churchill. From review there are several of the
primary arguments which are either no longer valid, or in the context of the 2016 renewal have considerably
weakened. It is an issue which legal opinion should be sought, and presented by Nalcor and the government prior
to any DG3 commitment to construct the MFGF.
All Newfoundlanders interested in Churchill Falls are recommended to read the excellent paper by Jim Feehan and
Melvin Baker on the subject of the renewal clause. They have done a yeoman’s service to the Province.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 16
Part V: Redirection Using the Deficiency Provisions
Contracts are generally written to provide protection to each party. Within the 1969 Power Contract [Ref. 15]
Hydro-Quebec required protection for its own cost in the event that CFLCo could not deliver the energy agreed.
This financial protection would allow payments to be made on the transmission facilities, and to find alternative
energy elsewhere to meet long term power sales agreements. The original Power Contract dealt with this issue
with the introduction of the term Deficiencies, and Article VIII – Firm Capacity Penalty. Within the Power Contract
the term “Deficiency” is defined within Schedule III – Article I as:
In respect of any request by Hydro-Quebec made pursuant to Section 5.3 hereof for the supply at any time
of capacity, that number of megawatts out of the total megawatts so requested which (exclusive of
capacity in excess of firm capacity) CFLCo fails to make available at the Delivery Point at such time.
Article VIII – Firm Capacity Penalty describes in detail the penalty which Hydro-Quebec are able to deduct from
their payments to CFLCo in the event of such deficiency. The details are as follows:
The penalties for deficiency beyond 24 hours is $40 per MW Day, an equivalent of $1.67/MWhr. This is an
incredibly low cost, but as per the original selling price, it suffers from the lack of escalation within the contract
term.
The adoption of the “Deficiency” provisions to the potential redirection of energy to the province of Newfoundland
is of primary interest to the Author. It is not clear why this was not pursued within the original court challenges by
the province. The contract clearly considered the potential for not meeting the firm capacity, and was the basis
which Hydro-Quebec entered into the contract. However in the late 70’s and early 80’s this may have weakened
the position of the government. Premised upon Clause 2e of the original lease agreement, the government’s
position was that they should be entitled to energy at the same cost of Hydro-Quebec. To keep CFLCo whole the
province would have to pay the cost equaling both the sales price to Hydro-Quebec, and any additional penalty
fee. This would have countered the “feasible and economic” argument. The Government of Newfoundland
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 17
argued that the order in council would also constitute a force majeure claim by CFLCo, where the penalties would
not be enforceable. Any additional damages which could have been sought by Hydro-Quebec would also not be
valid. It is likely the government did not pursue the deficiency mechanism as it would potentially open the door
for other, more significant damages which were obtainable at law.
However, in 2016 the total of the sales rate to Hydro-Quebec ($2/MWhr) plus the penalty fee ($1.67/MWhr)
would equal less than $4/MWhr. This is approximately 1/20th
of the Muskrat Falls generating costs alone!
The definition of Deficiency is broad, and could include the shortfalls resulting from CFLCo sales to other
customers. The 1998 Shareholder’s Agreement between Hydro-Quebec and Newfoundland and Labrador Hydro
[Ref. 13] has clear rules relating to the modification of existing contracts and the entering in of new contracts by
CFLCo Any such action would require approval of the majority of the directors and at least 1 director nominated
by both Hydro-Quebec and Newfoundland and Labrador Hydro. The reader may conclude that this will limit the
ability for CFLCo to sell additional power to NLH at a profit and simply pay the subsequent penalties to Hydro-
Quebec. However, Clause 3.7 of the Shareholders Agreement defines the duties of the directors. Each director
shall (i) act honestly and in good faith in the best interest of CFLCo, and (ii) exercise the care, diligence and skill
that a reasonable prudent person would exercise in comparable circumstance.
Although any such sale of excess power to NLH may constitute a breach of the power contract there is potentially a
clear business case for doing so. It is an arrangement that the Directors of CLFCo acting in the best interest of
CFLCo, would be obliged to support. For this potential to have any legal merit the price that NLH would pay for the
power would include the following:
1. Meet or exceed the price that energy is sold to Hydro-Quebec by CFLCo In 2016 this will be $2/MWhr.
2. The Penalties as defined within the Power Contract defined within Article 8 as $1.67/MWhr.
3. Any additional damages which may be payable to Hydro-Quebec under relief sought under general
damages from breach of contract.
The last point is the most interesting and open to debate. Although the 1969 Power Contract is silent on any sort
of general liability for breach of contract there may be a requirement to compensate Hydro-Quebec for any loss of
profit associated with the power sales from the Upper Churchill. This loss of profit would not be the loss of profit
actually realized today, but in fact would be the loss of profit that was contemplated when the contract was
signed. Other potential damages would be any consequential impacts for not meeting long term sales
agreements, or financing penalties. The latter was one of the primary arguments against the “feasible and
economic” legal challenge in the 1983 court case. However, the long term debt of CF is retired, thus extinguishing
this as a potential damage.
Philip Smith in his 1975 book “Brinco – The Story of Churchill Falls” provides an excellent narrative on the Churchill
Falls negotiations between the respective parties. It was clear that during the 1960’s people did not anticipate the
dramatic increases in energy costs. Smith states (Page 270) that Hydro-Quebec communicated to Brinco that they
expected 5.5 mil to be a reasonable selling price to the United States. This price was considered to be the upper
bound considering the growth in nuclear energy in this period. This was used to pressure Brinco to lower their
sales rates for energy to Hydro-Quebec, and in fact agree to the 25 year renewal at a fixed rate.
The fact that Hydro-Quebec have experienced tremendous profit since then is not relevant. At the time Hydro-
Quebec only predicted modest profits in the 2-3 mill range, and that this was used in the negotiations to drive a
very low sales price. This is well documented. Even if a normal annual escalation of 2.5% was applied, the profits
realized in 2016 would be $11/MWhr. Therefore, if CFLCo were to resell Upper Churchill power the final rate to
ensure a clear business case would have to be higher than $16/MWhr ($2 + $1.67 + $11/MWhr). If NLH purchased
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 18
power from CFLCo at $20/MWhr escalated at 2.5% per year until 2041 then CFLCo would effectively double their
profits. This is a business case which could not be ignored by the board of CFLCo. The $20/MWhr is also one
quarter of the cost of Muskrat Falls. It should therefore not be discounted by the people of the province.
It is important to note that the small amounts of electricity being diverted would also not likely constitute a
material breach of contract as the original Power Contract clearly considered, and addressed deficiencies of this
amount.
Guaranteed Winter Availability Contract – 1998 [Ref. 14]
In 1998 the Guaranteed Winter Availability Contract (GWAC) was signed, which provided additional revenue to
CFLCo for energy sold to Hydro-Quebec in the winter months, which was beyond the firm capacity within the 1969
Power Contract. This contract had a higher sales rate for this additional energy. It also has defined credits for
deficiencies, which has the same definition as in the Power Contract.
The GWAC differed from the Power Contract in that there is a Limitation of Liability Clause which limits the
damages for breach of contract by CFLCo to the deficiency credits calculated within the contract. This is provided
for the information of the reader below [Ref. 14].
Clause 5.3 of the GWAC also states that “for the avoidance of doubt, except for cases of Force Majeure, whenever
a Power Contract deficiency occurs, a deficiency shall be deemed to have occurred under this contract in respect
of the additional availability” .
Therefore, when considering the cost of Upper Churchill power redirected to Newfoundland Hydro there will be a
different penalty which would have to be compensated to Hydro-Quebec. This is summarized within Table 3.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 19
Table 3: NLH Purchase Price Using Deficiency Clauses
Period Contract Description Rate $/MWhr
2017
November 1 – March 31
GWAC
Deficiency Penalty Per Schedule B
24.40
CFLCo original Sales Fee (To keep them Whole)
24.40
Additional Damages1 0.00
Additional Profit to CFLCo2 10.00
Total 58.80
April 1 – October 31 1969 Power
Contract
Deficiency Penalty Per Article VIII
1.67
CFLco Original Sales Fee (To Keep them Whole)
2.00
Additional Damages3 11.00
Additional Profit to CFLCo2 5.00
Total 19.67 1) Assumed that in the absence of long term power agreements, and that Hydro-Quebec are a net
exporter of energy any other damages or remedies would be limited in the event of breach of contract by CFLCo
2) For CFLCo to redirect power to NLH, and to effectively breach the 1969 Power Contract, or the GWAC there needs to be a clear economic reason to do so. The additional premium offered by NLH would provide this economic rational to breach the respective contracts.
3) Within the 1969 contract Hydro-Quebec would likely seek, and would receive remedies resulting from the breach by CFLCo It is assumed that in the absence of any long term contracts, or financing penalties any damages would be capped at the cost of the investment by QH (from the penalty fee) and loss of profit. Loss of Profit would be capped at what was reasonable at the time of contract signing. The 11 $/MWhr is the anticipated profit of 2.5 mills per kwhr escalated at 3.0% per annum from 1966-2017.
Total Costs of “Deficiency” Electricity
The predicted shortfall of energy on the island of Newfoundland is primarily a winter phenomenon. The Muskrat
Falls facility, as per the Upper Churchill will be managed to produce the highest electrical output in the winter
months. Table 4 provides an indicative production summary by month of the year assuming that the Muskrat Falls
plant produces 4900 GWhr of energy annually.
Assuming that 54% of the energy would be redirected in the GWAC period a blended rate of $40.35/MWhr can be
calculated (54% x 58.80 + 46% x 19.67). Assuming an escalation rate of 2.5% the analysis presented within Figure 2
can be reproduced assuming the proposed blended rate for Upper Churchill energy. Although this is an academic
discussion, if Upper Churchill power was available per this rate structure it would be 4.9 and 1.2 Billion dollars
cheaper than Muskrat Falls for a discount rate of 2.5% and 8% respectively. This is summarized in Table 5.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 20
Table 4: Indicative Production (GWhr) From Muskrat Falls By Month
Table 5: Summary of Total Required Revenue Over 50 Yr Project Life
Discount Rate = 2.5% Discount Rate = 8%
Total Delta Total Delta
Muskrat Falls Base Case $17,010,682 $- $4,112,669 $-
Upper Churchill – Market $12,866,795 $4,143,887 $3,147,415 $965,254
Upper Churchill - Regulated $9,774,545 $7,236,137 $2,838,054 $1,274,615
Upper Churchill – Deficiency Provisions
$12,047,668 $4,963,014 $2,869,414 $1,243,255
The Author has presented an argument to utilize of the deficiency provisions of the 1969 Power Contract to
redirect energy from the Upper Churchill for domestic provincial use, at rates potentially less than the North
American norm. From the research completed there is very little discussion about this option available within the
public domain. During the previous court challenges it is likely that arguments about penalties would have evoked
breach of contract and opened the door to larger damages available to Hydro-Quebec at law. Like so many of the
other arguments concerning the original contract, the 2016 renewal means that these clauses should be reviewed.
In the absence of any long term power delivery obligations, requirements to replace the energy within the grid, or
penalties under the financing agreements it is not clear if the total damages payable to Hydro-Quebec would be
any more than loss of profit. The loss of profit would not be the large windfall which Hydro-Quebec has
experienced. Rather the damages of loss of profit would be that which was reasonably contemplated when the
Agreements were signed.
As briefly described in the previous section under Quebec law Hydro-Quebec could seek injunctive relief to force
CFLCo to continue to meet it contractual obligations [Ref. 29] under specific performance. This right is written into
Clause 11.1 of the GWAC. However, if Section 8 of the EPCA was evoked by the Public Utilities Board, and they
offered a price consistent with that provided in Table 3, I believe that there would be an argument to be made in
Days
Total Possible
Energy Based
on 824 MW
Rating Factor Total
31 613 0.9 551.8
28 554 0.9 498.4
31 613 0.9 551.8
30 593 0.8 474.6
31 613 0.5 306.5
30 593 0.4 237.3
31 613 0.38 233.0
31 613 0.4 245.2
30 593 0.6 356.0
31 613 0.7 429.1
30 593 0.9 534.0
31 613 0.9 551.8
4969.3
GWAC Period 54.1% 2687.6
1969 Period 45.9% 2281.8
Total
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 21
the court that financial damages is the most applicable form of remedy for breach. In this discussion the Electrical
Power Control Act provides the stick, and the compensation provided in Table 3 becomes the carrot.
Although Upper Churchill power was not one of the options that the government committed to study following the
issuance of the PUB report, Minister Kennedy has committed to provide information regarding several of the legal
options. Consider the July 31, 2012 call to back talk with Paddy Daly [Ref. 30]:
There is no question that we could recall Power under 92A. But we have been advised by a
leading contract expert in Quebec that the recall of power for commercial purposes would not
amount to a Force Majeure which is the only way to set aside the contract. In essence what we
would is to be subject to billions of dollars of damages for breach of the Power Contract which
is governed by the law of Quebec. We will also be providing information on that.
Clause 92A of the Canadian Constitution may potentially provide a means to recall power from the Upper
Churchill. However it is not the only legal means at our disposal. The Electrical Power Control Act is an enabler for
the recall of power from the Upper Churchill. In addition to providing a legal opinion on 92A the Government
should also provide legal opinion on the Applicability of EPCA-1994, utilizing the Penalty clauses entrenched in the
1969 Power Contract. The question is simple “what are the damages which we would be potentially exposed to,
and do those damages represent a lower cost option than compared to the Muskrat Falls development”.
Part VI: Power Purchase From Quebec and/or CFLCo – FERC Guidelines
Part III of this essay provided an economic model to illustrate that if Upper Churchill power was available at market
rates then it would prove to be a lower cost option when compared to Muskrat Falls. This is based on the long
term projections from the US Energy Information Association (EIA). Considering that a phased approach to the
Muskrat Falls project with the construction of the Labrador Island Link within the current schedule, would allow
immediate access to the Upper Churchill power this is an option which could be considered. A decision can be
made at a latter date to construct the Muskrat Falls generation facility when the island demand warrants it
(presently it do not) and/or the US market is such that it will make economic sense to proceed with the generation
element of the project. .
Part IV and Part V provides academic discussions about potential mechanisms to get access to Upper Churchill
power through legal means. This is either re-visiting the 1976 request of the Government of Newfoundland to
recall 800 MW, or by CFLCo effectively breaching the contract with Hydro-Quebec to sell power to Newfoundland
at a price potentially less than the North American benchmark. Both these arguments are academic, but it is a
debate which should be happening prior to sanctioning the Muskrat Falls project.
However, what should be certainly considered is the access rights that Newfoundland and Labrador would have to
the Churchill Falls power, or in fact energy from other North American utilities, under the US Federal Energy
Regulatory Commission. First some background must be provided. The Federal Energy Regulatory Commission
(FERC) is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates,
hydroelectric licensing, natural gas pricing, and oil pipeline rates. FERC also reviews and authorizes liquefied
natural gas (LNG) terminals, interstate natural gas pipelines and non-federal hydropower projects. In recent
years, the FERC has been promoting the voluntary formation of Regional Transmission Organizations (RTOs) and
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 22
Independent System Operators (ISOs) to eliminate the potential for undue discrimination in access to the electric
grid [Ref. 16].
In the late 1990’s FERC passed the Regulation 888 which allowed for the deregulation of the electricity markets.
There was a clear drive to decouple the generation and transmission of electricity to ensure the most cost effective
solution to the US consumers. Any foreign utility would have to offer reciprocity to enable a license to sell energy
in the United States. To protect it’s exports into the United States, Hydro-Quebec had to adopt the regulations of
FERC, effectively allowing outside utilities to wheel power over its transmission facilities. Brian Tobin in a 1997
speech to the New England governors effectively summarized the initiative [ref. 17].
This new market structure is due in no small measure to the leadership of the U.S. Federal Energy
Regulatory Commission (FERC). One year ago, FERC Order 888 established a fair and sustainable means
of securing open and non-discriminatory trade in electricity at the wholesale level. The FERC has provided
the new deregulated market environment, thereby allowing the benefits of technological change and
economic advantage to get to the end consumer. Utilities across North America are responding to this
challenge. I was pleased to see, just a few weeks ago, that Hydro-Quebec was successful in obtaining
conditional FERC approval for a power marketing licence. I am confident Hydro-Quebec will meet these
conditions. Newfoundland and Labrador Hydro intervened in that FERC hearing. The purpose of the
intervention was not to protest or prevent Hydro-Quebec from achieving a power marketing licence.
Indeed, our success in this new market is linked to Quebec meeting all the FERC conditions of open and
transparent transmission access; and, that was the purpose of the intervention.
Nalcor have successfully wheeled the excess Upper Churchill recall power using these provisions. They have also
unsuccessfully lobbied to get access to Hydro-Quebec Transenergie lines for the purposes of wheeling power
generated from the Lower Churchill development. However, what I have not read in any debate is the applicability
of FERC is ensuring the Newfoundland Consumer gets equal access to the Upper Churchill Power. Considering that
FERC mandate is as follows:
The Federal Energy Regulatory Commission (FERC) in 1997 upheld its landmark final rule on open access
transmission service and stranded costs, Order No. 888. 1 The FERC's Open Access Rule requires each
"public utility" that owns, operates or controls interstate electric transmission facilities to (i) provide
transmission service to its customers on a basis comparable to that which it provides transmission service
for itself on behalf of its own customers, (ii) offer generation, transmission and ancillary services on an
unbundled, separately-priced basis, and (iii) separate its marketing and transmission functions. The pro-
forma open access transmission tariff, which sets forth the standard terms and conditions under which
public utilities must of- fer open access transmission service, implements the principle of comparability of
service. As indicated by the FERC, "unbundled electric transmission service will be the centerpiece of a
freely traded commodity market in electricity in which wholesale customers can shop for competitively-
priced power." 2
The requirement for FERC to separate the generation and transmission functions of a public utility is one of the
reasons why Hydro-Quebec restructured to have the HQ Transenergie transmission division. The 1969 Power
Contract is with Hydro-Quebec, but in the application of FERC there must be an internal transmission fee applied
to the power prior to the resell into the United States. Furthermore, I would consider that it is the fundamental
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 23
principal of open and de-regulated energy markets that Newfoundland would get equal access to the Upper
Churchill power at the same rate which Hydro-Quebec sells it power outside of the Heritage Pool.
There is a case that FERC regulations, and the requirement for reciprocity to all parties, would ensure that
Newfoundland consumers would get access to Upper Churchill energy at market rates, subtracting the normal
transmission fee. Presently prices in New England are in the 3-4 cents per kw-hr range. Subtract the wheeling fee
which HQ has previously charged we should be getting energy in the 2-3 cents a kwhr from the Upper Churchill
facility. This is 10 times what Hydro-Quebec are paying for the same energy from CFLCo But most importantly it is
about 1/3rd
of the cost of energy produced from Muskrat Falls.
I am not an expert in this subject area, but the above discussion is certainly consistent with the principals of FERC.
The Government of Newfoundland and Labrador as well as Nalcor have pursued the application of FERC with
respect to the development of the Lower Churchill. They should also pursue equal access to the generation of the
Upper Churchill power with the same conviction. Even if for “grandfathering reasons” Upper Churchill energy is
not theoretically available I do not see any reason why low cost natural gas electricity generated in New England
could not be transmitted over the Hydro-Quebec lines to meet Newfoundland energy requirements during the
winter months. On a long term basis this may not be the best option. But considering that we only need to bridge
to 2041 it is certainly an alternative which deserves more than a cursory review. Unlike Nalcor’s DG1 screening the
option for electrical imports need to be made in the current shale gas environment.
It is also interesting to note that although FERC permitted the grandfathering of existing power purchase
agreements or transmission contracts there was a clear effort to move away from this. FERC has published a paper
relating to grandfathered rights [Ref. 18] which clearly indicates
The 1969 Power Contract renewal is automatic in 2016. But is there a case to renegotiate the automatic renewal
pursuant to change in law, or the FERC deregulated market? Does CFLCo have a case to renegotiate the 1969
Power Contract under the requirements for FERC to allow transmission over existing transmission facilities per the
OATT guidelines? Does the 2016 renewal provide the opportunity to open this debate?
The FERC regulations are embedded in fairness, and equity amongst parties. To be granted a license to sell power
in the US Hydro-Quebec have to operate in a manner consistent with these principals. Right now the current
situation does not appear fair to the people of Newfoundland and Labrador.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 24
Part VII: Peak Power Requirements – The Upper Churchill Trump Card
Do we need the power? This is one of the 2 questions used by government to frame the Muskrat Falls debate.
Although one can argue how much power is actually required, it can not be denied that we will need access to new
energy into the future. Due to our diminishing industrial load, cold climate, larger homes and heavy reliance on
base board heating our energy requirements are primarily within the winter months. Although Muskrat Falls has a
predicted average annual production of 4900 GWhr, it is a run of the river facility and is therefore not well suited
for peak loads. This was identified within Volume II of the MHI submission to the PUB [Ref. 33].
As identified by the Author [Ref. 1] even if the Muskrat Falls plant can operate at 85% load factor in winter then
there will still be potential shortfalls in capacity in the winter months when the historical generation profile of the
island’s heritage hydro pool is considered. This is illustrated within Figure 4. When considering the 167 MW of
peak power delivery to Emera there could be shortfalls experienced as early as 2035.
To meet the peak winter requirements the Infeed alternative presented to the PUB requires the addition of new
small hydro-electric on the island, as well as some 500 MW of new thermal generation. In 2067 the generation
capacity mix for the infeed option will be based on 65% hydroelectric and 35% thermal. Energy will be based on a
dispatch pattern that minimizes fuel use [Ref. 33]. In addition to thermal generation equivalent to Holyrood, the
islands peak demands will be also met through a complicated water management agreement where Muskrat Falls
power is provided to Hydro-Quebec in the summer to save water for the winter peak period [Ref. 31].
Although there is little public discussion of the additional peak generation requirements there is hundreds of
millions of dollars of additional capital investment required following the construction of Muskrat Falls to meet the
island demand in winter. To allow the reader to fully understand the financial commitment which Nalcor are
about to embark on Figure 5 provides a summary of the total annual revenue requirement for the full Infeed
expansion option [Ref. 32], as well as compared the revenue for Muskrat Falls alone [Ref. 6].
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 25
Figure 4: Typical Monthly Generation Profile [Ref. 1]
Figure 5: Total Annual Revenue Requirement for Infeed Option [Ref. 32]
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 26
An advantage offered by the potential power purchase from the Upper Churchill is that this additional peak
generation requirements on the island can be potentially reduced. There is plenty of capacity from the Upper
Churchill plant to meet the islands demands in winter. When considering the cost of the full expansion scenario,
including the MFGF, the small hydro and the additional thermal generation there is an additional savings beyond
what was presented within Table 2 when considering power purchases from the Upper Churchill.
The government promotes the Muskrat Falls development as a means to provide wealth to future generations of
Newfoundlanders. Figure 5 clearly demonstrates that the development will represent a major financial liability for
the province for the entire 50 year term. The potential financial benefits from early energy exports is clearly offset
by the required thermal generation which will be likely required in winter to fulfill the Emera commitment. By the
exclusion of power exports from the PUB terms of reference there has not been the opportunity provided to the
public to truly understand if the Emera partnership will lower or increase electrical rates to the island consumers.
This is yet another example of how the current Muskrat Falls development plan does not follow the fundamental
policies identified within the Electrical Power Control Act.
A benefit of the Upper Churchill alternative is that it represents a power supply which can only be considered
limitless. It can meet our peak winter requirements, and it will reduce the need to supplement the grid with
thermal generation. Most importantly as we are not signing a 50 year “take or pay agreement” it significantly
reduces the risk to the Newfoundland consumer if the provincial demand does not grow at the 0.8% annual rate as
forecasted by Nalcor [Ref. 32]. Although outside the scope of this discussion paper the Author has provided a
sensitivity on the variability of the demand forecast [Ref. 1].
Part VII: Conclusions
We are presently in a time of contrast. Fuelled by shale gas the electricity markets in North America have
softened, to where the selling price is now 1/3rd
of where it was prior to the financial crisis in 2008. Although the
economy in the US shows signs of a modest recovery, the shale gas is ensuring that the long term electricity price
projections remain stable. Meanwhile project costs in Newfoundland and Labrador are increasing. This is being
experienced in all major projects underway, and is driven by the robustness of the local economy. Nalcor has
acknowledged that the Muskrat Falls cost will increase from the DG2 numbers. It is rumored that the final price
tag will be around 8.5 billion, a 37% increase from the estimates of just 2 years ago [Ref. 19]. Unfortunately, is
even prior to any substantial physical work being completed.
We must look at this objectively. Muskrat Falls can not be validated by comparing it to oil generation, the latter
being one of the most expensive ways to generate electricity in the world. We must look at all options including
wind and natural gas. However, we also look at the solution using power generated from the Upper Churchill
transmitted by a subsea link to the island of Newfoundland. Forgetting existing contracts, or political realities all
would agree this is the most obvious solution. In this essay the author has suggested that over the 50 year project
life there will be “real” savings of up to 4 Billion dollars to the Newfoundland consumer if Upper Churchill power
was purchased at market rates. This type of savings can not be overlooked in an effort to correct the mistakes of
the past. It is the option which is in the best interest of the people of the province.
Within this essay the author has provided three scenarios to potentially gain access to Upper Churchill power at
market rates, or better. Each of these arguments are stronger when considering that the 1969 Contract is set for
renewal in 2016. Although the renewal is automatic it does potentially weaken some of the legal arguments
successfully used by Hydro-Quebec in the earlier court cases. The de-regulation of the North American electricity
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 27
markets should also ensure that Newfoundlanders gain access to energy at competitive rates. In the current
energy climate Muskrat Falls is not a competitive solution.
This essay was penned as the Government and Nalcor have not offered much tangible discussion regarding power
purchases from CFLCo or Hydro-Quebec. There was no mention of Churchill Falls in Nalcor’s screening assessment
included within the November 10th
, 2011 submission to the PUB. Although Minister Kennedy did commit to
examining natural gas and wind, there has been no such commitment to study or review the concepts presented
herein. As far as the public is concerned it remains an unexplored alternative.
The fundamental question in the entire debate is if the Newfoundland consumer are getting the lowest cost power
available to them? In not exploring Upper Churchill power, even as a purchase from Hydro-Quebec, there has
been fundamental departure from the power policy objectives of the EPCA-1994. It is a shame that the PUB does
not have the opportunity to confirm and validate the DG3 numbers for Muskrat Fall’s project. If the PUB has no
authority to confirm the largest provincial expenditure in our history it has been marginalized and perhaps no
longer relevant? However Section 7.3 of the EPCA gives the PUB a defense against such strong armed tactics of
the government. I provide it for the reader to interpret:
The people of the province are being railroaded into a project where not all the options have been explored to the
fullest. The financial commitment is enormous, and the decision can not be reneged. The decision to proceed
with the development will commit multiple generations of Newfoundlanders. Under the Electrical Power Control
Act there is an obligation for the government, Nalcor and the PUB to pursue all options to the fullest, this must
include the Upper Churchill alternative. I can only hope that someone takes the charge. I would like conclude this
discussion paper by quoting Clyde Wells when he introduced the Electrical Power Control Act in 1994 [Ref. 21].
Section 7 is entirely new and what it provides is that where any producer or retailer is concerned that it may not be able to generate enough power to meet the anticipated power needs of its customers, and its perspective customers, in the manner required by this act, that is the lowest possible cost power, it may request the Public Utilities Board to conduct an inquiry into that matter. The government could request the PU Board to do it, or the PU Board could do it of its own accord under subsection (3). Then they are required, under 8(1) to hold a public hearing. So the whole matter has to come before a full public hearing so that everybody who has an interest in the cost of power in the Province has a means of expressing a view on how new future power supplies should be developed. That's part of the overall planning. Instead of it being done now, quietly, in Hydro's offices, or in government offices, or in the Department of Mines and Energy, it will be done in a way that has, in the end, to be very public and transparent, and require planning before the Public Utilities Board. This is what 8(1) requires.
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 28
References
1 http://www.pub.nl.ca/applications/MuskratFalls2011/files/comments/11-JM-2012-02-29-Rev1.pdf
2 http://www.exec.gov.nl.ca/exec/speeches/newport.htm
3 http://www.ferc.gov/market-oversight/mkt-snp-sht/2012/07-2012-snapshot-ne.pdf
4 http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2012&subject=0-AEO2012&table=8-
AEO2012®ion=0-0&cases=ref2012-d020112c
5 Page 56 of the annual report references the 5.4 cents/hwhr
http://www.hydroquebec.com/publications/en/annual_report/pdf/annual-report-2011.pdf
6 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/CA-KPL-Nalcor-27-Rev1.pdf
7 Newfoundland Attorney General Vs. CFLCo (Goodridge Court Case 1983)
8 Newfoundland Attorney General Vs. CFLCo (Supreme Court of Appeal -1985)
9. SCC 1: Newfoundland: http://scc.lexum.org/en/1988/1988scr1-1085/1988scr1-1085.html
10. SCC2: Quebec http://scc.lexum.org/en/1982/1982scr2-79/1982scr2-79.html
11 http://www.assembly.nl.ca/legislation/sr/statutes/c5161.htm
12 http://www.ucs.mun.ca/~feehan/CF.pdf
13 1999 CFLCo Shareholders agreement
14 1998 Guaranteed Winter Availability Contract
15 http://bondpapers.blogspot.ca/2009/12/1969-churchill-falls-power-contract.html
16 http://en.wikipedia.org/wiki/Federal_Energy_Regulatory_Commission
17 http://www.exec.gov.nl.ca/exec/speeches/newport.htm
18 FERC Grandfathered Rights
http://www.spp.org/publications/FERC_TREATMENTOFGRANDFATHEREDAGREEMENTS.pdf
19 http://www.cbc.ca/onpoint/ [13:50 into interview of August 11, 2012]
20
http://www.nalcorenergy.com/uploads/file/nalcor%202010%20business%20and%20financial%20report
_final_may%203%202011(1).pdf
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 29
21 http://www.assembly.nl.ca/business/hansard/ga42session2/94-03-03.htm
22 http://www.gov.nl.ca/lowerchurchillproject/muskrat_falls_pub_final_report.pdf
23 http://www.cbc.ca/news/canada/newfoundland-labrador/story/2012/04/07/nl-on-point-jerome-
kennedy-407.html
24 http://bondpapers.blogspot.ca/2011/10/if-la-romaine-isnt-profitable-nlpoli.html
25 http://www.tomadamsenergy.com/2012/07/27/govt-interference-ruining-manitobas-power-
system/?utm_source=rss&utm_medium=rss&utm_campaign=govt-interference-ruining-manitobas-power-system
26 Page 42 of http://www.pub.nl.ca/applications/MuskratFalls2011/files/transcripts/Feb15-12.pdf
27 http://www.assembly.nl.ca/legislation/sr/statutes/e05-1.htm
28 http://bondpapers.blogspot.ca/2011/05/dunderdale-using-rigged-deck-against.html.
29 http://www.blakes.com/dbic/guide/dispute/html/contractual_liability_in_quebe.html
30 Minister Kennedy VOCM July 31: http://www.youtube.com/watch?v=kW1AHKs3dzQ
31 NTV interview Ed Martin Sunday August 19, 2012
32 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/PUB-Nalcor-5.pdf
33 http://www.pub.nl.ca/applications/MuskratFalls2011/files/mhi/MHI-Report-VolumeII.pdf
34 http://www.pub.nl.ca/applications/MuskratFalls2011/files/submission/Nalcor-Submission-Nov10-11.pdf
35 http://www.pub.nl.ca/applications/MuskratFalls2011/files/presentation/Presentation-Martin-Feb20-
12.pdf
Upper Churchill – The Unexplored Alternative
A Discussion Paper Page 30
Appendix 1
Calculations to determine the $/MWhr costs of Muskrat Falls generation