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Upper Churchill - The Unexplored Alternative
Upper Churchill - The Unexplored Alternative
Upper Churchill - The Unexplored Alternative
By: JM
August 2012
Part I: Introduction
On February 29 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 NALCORs 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. 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. 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. 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. A delay to the MFGF would permit the verification of the subsea cable prior to the de-commissioning of Holyrood thermal facility. 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. 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.
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It is clear to most pundits that Nalcors 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. Nalcors 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
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Following the PUBs 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.
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 hydroelectric 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
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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.
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Supply, Disposition, Prices, and Emissions (2010 cents per kilowatthour) Generation Transmission Distribution (nominal cents per kilowatthour) Generation Transmission Distribution
2010 2015 2020 2025 2030 2035 5.9 1 2.9 5.9 1 2.9 5.6 1.1 3 6 1.2 3.3 5.7 1.1 2.8 6.7 1.3 3.3 6 1.1 2.7 7.7 1.4 3.4 6.1 1.1 2.6 6.4 1.1 2.6
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].
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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 Falls 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.
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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 Nalcors 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,
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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
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Table 2: Summary of Total Annual Revenue during 50 year Term (Discounted to 2010 Dollars)
Muskrat Falls Base Case Upper Churchill Market Upper Churchill Regulated
Discount Rate = 2.5% Total Delta $17,010,682 $$12,874,318 $4,136,364 $9,774,545 $7,236,137
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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]:
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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].
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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 illconsidered 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]:
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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 thats 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
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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 1980s 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 EPCA1994:
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:
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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 cant 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.
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As was recommended within the authors February 29 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 yeomans service to the Province.
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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 70s and early 80s this may have weakened the position of the government. Premised upon Clause 2e of the original lease agreement, the governments 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
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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 1960s 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 HydroQuebec 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
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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.
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Table 3: NLH Purchase Price Using Deficiency Clauses Period Contract Description Rate $/MWhr 2017 24.40 24.40 0.00 10.00 58.80 1.67 2.00 11.00 5.00 19.67
November 1 March 31
GWAC
April 1 October 31
Deficiency Penalty Per Schedule B CFLCo original Sales Fee (To keep them Whole) 1 Additional Damages 2 Additional Profit to CFLCo Total Deficiency Penalty Per Article VIII CFLco Original Sales Fee (To Keep them Whole) 3 Additional Damages 2 Additional Profit to CFLCo Total
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.
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Days 31 28 31 30 31 30 31 31 30 31 30 31
Factor 0.9 0.9 0.9 0.8 0.5 0.4 0.38 0.4 0.6 0.7 0.9 0.9 54.1% 45.9%
Total 551.8 498.4 551.8 474.6 306.5 237.3 233.0 245.2 356.0 429.1 534.0 551.8 4969.3 2687.6 2281.8
Muskrat Falls Base Case Upper Churchill Market Upper Churchill - Regulated Upper Churchill Deficiency Provisions
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
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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
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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 1 transmission service and stranded costs, Order No. 888. 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 proforma 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 competitively2 priced power."
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
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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.
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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 islands 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].
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Figure 5: Total Annual Revenue Requirement for Infeed Option [Ref. 32]
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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.
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References
1 2 3 4 http://www.pub.nl.ca/applications/MuskratFalls2011/files/comments/11-JM-2012-02-29-Rev1.pdf http://www.exec.gov.nl.ca/exec/speeches/newport.htm http://www.ferc.gov/market-oversight/mkt-snp-sht/2012/07-2012-snapshot-ne.pdf http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2012&subject=0-AEO2012&table=8AEO2012®ion=0-0&cases=ref2012-d020112c 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 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/CA-KPL-Nalcor-27-Rev1.pdf Newfoundland Attorney General Vs. CFLCo (Goodridge Court Case 1983) Newfoundland Attorney General Vs. CFLCo (Supreme Court of Appeal -1985) SCC 1: Newfoundland: SCC2: Quebec http://scc.lexum.org/en/1988/1988scr1-1085/1988scr1-1085.html
6
7 8 9. 10. 11 12 13 14 15 16 17 18
http://scc.lexum.org/en/1982/1982scr2-79/1982scr2-79.html
http://www.assembly.nl.ca/legislation/sr/statutes/c5161.htm http://www.ucs.mun.ca/~feehan/CF.pdf 1999 CFLCo Shareholders agreement 1998 Guaranteed Winter Availability Contract http://bondpapers.blogspot.ca/2009/12/1969-churchill-falls-power-contract.html http://en.wikipedia.org/wiki/Federal_Energy_Regulatory_Commission http://www.exec.gov.nl.ca/exec/speeches/newport.htm FERC Grandfathered Rights http://www.spp.org/publications/FERC_TREATMENTOFGRANDFATHEREDAGREEMENTS.pdf http://www.cbc.ca/onpoint/ [13:50 into interview of August 11, 2012]
19 20
http://www.nalcorenergy.com/uploads/file/nalcor%202010%20business%20and%20financial%20report _final_may%203%202011(1).pdf
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25 http://www.tomadamsenergy.com/2012/07/27/govt-interference-ruining-manitobas-powersystem/?utm_source=rss&utm_medium=rss&utm_campaign=govt-interference-ruining-manitobas-power-system 26 27 28 29 30 31 32 33 34 35 Page 42 of http://www.pub.nl.ca/applications/MuskratFalls2011/files/transcripts/Feb15-12.pdf http://www.assembly.nl.ca/legislation/sr/statutes/e05-1.htm http://bondpapers.blogspot.ca/2011/05/dunderdale-using-rigged-deck-against.html. http://www.blakes.com/dbic/guide/dispute/html/contractual_liability_in_quebe.html Minister Kennedy VOCM July 31: http://www.youtube.com/watch?v=kW1AHKs3dzQ NTV interview Ed Martin Sunday August 19, 2012 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/PUB-Nalcor-5.pdf http://www.pub.nl.ca/applications/MuskratFalls2011/files/mhi/MHI-Report-VolumeII.pdf http://www.pub.nl.ca/applications/MuskratFalls2011/files/submission/Nalcor-Submission-Nov10-11.pdf http://www.pub.nl.ca/applications/MuskratFalls2011/files/presentation/Presentation-Martin-Feb2012.pdf
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