Monday, 29 August 2016

THE QUEBEC SUPERIOR COURT GIVES NALCOR NOTHING: WATER MANAGEMENT A PIPE DREAM

Introduction
Just as the pilot signaled readiness for take-off to Saglek in northern Labrador, word arrived that the Quebec Superior Court had delivered its verdict on Quebec Hydro's challenge to Nalcor's interpretation of the Upper Churchill Renewal Agreement. 

Delayed two days in Goose Bay by foggy conditions on the coast, the other members of small group heading out for two weeks of hiking and kayaking seemed energized by the sheer thrill of the opportunity to complete a northern Labrador adventure including the uncertain expectation of committing to the outdoors in an often harsh cold region, 150 miles north of Nain. 

Though I hate the cold, it was less the thought of subzero temperatures and rough seas that sent a chill down my spine. Nalcor, a reckless and uncontrolled crown corporation, one seemingly determined to bankrupt the province, instills in my bones an even worse terror. 

Let's face it: the Quebec Court was never expected to diminish the powers vested in Quebec Hydro under the 1969 Upper Churchill contract. Sober watchers knew that Nalcor had thrown caution to the winds in its bid for Muskrat sanction long before Hydro Quebec acted. Hubris, compounded by hapless government oversight, created the conditions for the Nalcor leadership to ignore the impact of a total judicial loss in a Quebec-centric Court. 


Former Nalcor CEO Ed Martin and his sidekick, V-P Gilbert Bennett, had waived off all warnings that the sanction of the mega project ought to be delayed at least until judicial clarity had been obtained via a declaratory judgement. After all, the case was inseparable from the Water Management Agreement (WMA). Without the WMA Muskrat, in spite of its enormous cost, would become a much diminished facility. 

The twin engine Otter flew inexorably above the trademark silver grey Labrador clouds obscuring the landscape below. Not nearly so opaque was the effect of the Court Decision just rendered. There were no caveats in the Corporation's sterile press statement. It was clear the Court had given Nalcor nothing.

Instinctively, I knew that the script writers at Nalcor would make light of the Court Decision. They would even dissociate it from any relationship with water management. But, then, persistent institutional lying has served to advance Muskrat from the very beginning. Seemingly, the strategy still gets approval, even from the new CEO.  

I had more than two weeks to think about how the impact of the Quebec Superior Court Decision might be dealt with on this Blog. Fortuitously, some time ago I had written a Paper titled "The Quebec Superior Court: Water Management's Dead End" following commencement of Hydro Quebec's legal action but did not use it. I felt the Paper was important to record Nalcor's assurances, its inconsistencies, and the warnings critics heaped on the leadership not to continue the project without legal certainty. I wanted to compare their assurances with any award delivered by the inevitable judicial outcome. 

Now I was anxious to get it posted, to begin discussion on how the Court's Decision skewers the fundamentally sound idea of water management - Nalcor having made several unwarranted assumptions. In effect, the Dunderdale/Martin/Bennett trio had simply rolled the dice on a public policy decision with grave financial and other implications. 

The length of the Piece will try the patience of the most ardent reader. Still. I suggest it is impossible to understand the impact of an issue if the the only clarity available about what was at stake in the Court challenge is defined by the fools who brought us there. We will talk about the actual Judicial outcome in the coming days.

Perhaps, as you read this Paper you will want to keep asking yourself this question: in a Decision that gave Nalcor access to not one more electron or even a modicum of control over HQ's right to the scheduling of power from the Upper Churchill, on what basis can Nalcor declare the Court's Decision unrelated to water management? 

You might have thought that at $11.4 billion and counting Muskrat Falls is a hydro project in serious trouble. Now, discount the effect of the Water Management Agreement, too. 

Hopefully, this Paper will help clarify some of your questions. 

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The Quebec Superior Court: Water Management's Dead End
By Des Sullivan

Preface

Most people waved passively as Nalcor blindly pursued Muskrat Falls’ sanction.  Likely, confidence in Danny Williams’ legacy project afforded no room for doubt that the facility will have sufficient water to run the turbines and produce as promised.

Given the acrimonious history of the 1969 Upper Churchill power Contract, few ever thought possible Hydro Quebec (HQ) could find its way into the Muskrat narrative, too. 

Unfortunately, Nalcor had chosen not to be forthright and warn the people of the province that all was not plain sailing with the plan it had hatched.

Hadn’t Williams confirmed that the 1100 km. Anglo Saxon route - which ran down to southern Labrador, across the Strait of Belle Isle eventually joining the Maritime Link to Nova Scotia - was the one that avoided interference by Quebec?

He had.

But, Williams was never big on details especially if they interfered with his vision. Or, should the word be version?

Muskrat power capacity is inextricably linked to the Upper Churchill reservoir. How? Via the water management agreement (WMA), a plan having doubtful legal status.

While the WMA was approved by the Public Utilities Board (PUB) it failed to receive essential HQ consent. From the beginning, the plan was subject to rights awarded in prior agreements including the 1969 Upper Churchill Contract, the Renewal Agreement, the Guaranteed Winter Availability Contract (GWAC), and the Twin Falls Agreement. But even those limitations failed to magnify the possibility Nalcor might not be permitted to implement the plan, at all.  A legal challenge, initiated by HQ, will render it useless if Nalcor's claims to the Upper Churchill reservoir are not upheld by the Quebec Superior Court.

It is not as if HQ had failed to telegraph warning signals in advance of Muskrat Falls’ sanction. They involved complex legal issues which deserved clarification by Nalcor and the Government – something that was not forthcoming.  Rightly, critics pilloried Nalcor for proceeding with Muskrat Falls sanction in spite of the risks involved.

Did Nalcor’s myopic quest for project sanction outstrip the duty of care which ought to have governed such a major decision?

The public will have to make up its own mind on this question, based not just upon the water management issue, but upon others raised here. However each of them will be apprised, Nalcor had to have known it had no history of winning a legal challenge in a Quebec Court. Yet, it was prepared to spend billions of dollars of public money even as it chased a dead end.

In addition, the Upper Churchill Renewal Agreement held no ‘smoking gun’ offering any assurance of successful legal recourse. In short, the failure to obtain legal clarity first was tantamount to a roll of the dice. Why had the Nalcor leadership not learned at least that much?

In order to understand how this situation evolved and what is at stake, we should begin with a short history and explanation of the issue which, stripped to its essence, is about whether Muskrat will be able to produce enough power WHEN it is needed and whether Holyrood will have to be re-tooled (and fuelled) to help keep the lights on, especially during the winter.

Genesis of the Water Management Agreement (WMA)

In November, 2009, Nalcor filed an application to have the PUB establish the WMA on the Churchill River.  The authority was given the PUB under the Electrical Power Control Act (EPCA).  The Act provides that “all sources and facilities …in the province should be managed and operated in a manner…that would result in the…coordination of water flow when two or more operators are on the same river.”

Nalcor sought access to the Upper Churchill reservoir in order to optimise the power potential of the two proposed Lower Churchill hydro projects. The system devised is best understood if one understands it “was directed towards the storage of energy not water”.

In essence, the WMA created an “energy bank”, one that made provision for an independent coordinator to record power delivered to the Upper Churchill for supply to HQ (effectively storing water in the Smallwood reservoir) when Muskrat produced surplus energy. Similarly, the coordinator would record drawdowns from the Upper Churchill when banked energy was needed by Nalcor due to insufficient water flows downstream.

CFLCo manages the Upper Churchill hydro facility. The Company is owned 34.2% by Hydro Quebec; the other 65.8% by Newfoundland and Labrador. In spite of the Province’s majority ownership CFLCo still enjoys limited decision-making flexibility.  The Company operates under a shareholders' agreement which requires a special majority decision of the Board of Directors in certain matters which includes the plan of water management. Hydro Quebec directed the CFLco board not to support it, giving rise to the PUB’s decision to impose the plan subject to the agreements mentioned.

In spite of this conditional feature, Hydro Quebec maintained that the WMA, and plans by Nalcor to access energy produced by the Upper Churchill in excess of that provided in the Renewal Contract (as Nalcor interpreted it), still impinged its rights under the Renewal Contract causing the legal challenge to be brought. 

Essentially, HQ alleged that Nalcor applied a new and incorrect interpretation of the Renewal Contract allowing it to change the way it runs the facility, one that permits Muskrat Falls and Churchill Falls to be operated as a single integrated system. HQ further argues that CFLCo cannot sell to “third parties”, including Nalcor, an amount of power in excess of the 300 MW Recall provision contained in the original contract. 

If HQ’s arguments are upheld in Court, the WMA will be lost because Nalcor will have no power to direct CFLco management to do anything to help it co-ordinate the power generation schedule. The justification for project sanction will have foundered.

The importance of the WMA was emphasized by then Natural Resources Minister Kathy Dunderdale who told the House of Assembly on March 30, 2010 the PUB had established the agreement “to be binding upon Nalcor and CF(L)Co”. The Premier did not tell the House it could make no such imposition on CFLco unless HQ agreed.

As Premier, Dunderdale also told the House of Assembly during Question Period, on November 5, 2013: “one of the things that we realized right from the very start was that we had to have control of water management of…the Churchill River.”

Back in 2009 its importance was manifested by Nalcor, too, in the extensive documentation it submitted to the PUB in support of its Application for the WMA.  Nalcor’s pre-filed evidence echoed the language of the EPCA:

“a water management agreement is required to provide the mechanisms of coordinated production. The operation of the agreement will ensure the efficient use of water on the river system by ensuring that water is available to meet all producers’ requirements, while maximizing the energy produced from the water resource.”

Nalcor confirms that the Upper Churchill alone, running at capacity, provides water flows sufficient to generate 630 MWs of Muskrat Falls’ 824 MWs name plate capacity.  But, the problem facing Muskrat, if Nalcor loses the legal challenge, is that the Upper Churchill does not run at capacity all of the time.  Power is generated according to a demand schedule provided to CFLco by HQ within limits defined in the 1969 Contract, which HQ states is unchanged in the Renewal Agreement.

A minimum flow of water from the Upper Churchill maintains the river’s ecosystem, but that quantity, which reduces Upper Churchill production to just 1200 MW, is far less than the amount Muskrat needs to operate at any amount near its capacity. The additional water flows below the Upper Churchill reservoir, from rivers are tributaries, are insufficient alone to compensate for the shortfall required for maximum production. 

The challenge to Nalcor’s schedule is further compounded because even when the HQ schedule calls for a higher load it takes twelve hours for the additional water to arrive at the Muskrat Falls plant.  This is hardly an arrangement, in the absence of a working WMA, which allows the facility to reach its power making capacity for extended periods of time, and to meet the demands of both the Island and Nalcor’s export customers. The schedules will simply not always be the same. 

There are other problems, too.

"Run of River" facility makes WMA mandatory 

The natural water flows, entering the Churchill River from below the Smallwood reservoir, are seasonal. As one would expect, the period of highest demand for power (January to May) does not coincide with the period of highest water volume, which occurs during the spring freshet.

Underlying those issues is the size of the Muskrat Falls reservoir system.

This facility is not like the Upper Churchill’s Smallwood reservoir system which has a catchment area the size of the Province of New Brunswick. That system affords CFLco the ability to maintain peak power production for long periods even if the ecosystem feeding it experiences periods of low precipitation over several years.

In contrast, Muskrat has a very small reservoir, actually 0.2% the size of the Smallwood reservoir, capable of storing only enough water for a day or two of production.  For that reason it is described as a “run of river” hydro facility.  Excess water is spilled, representing a loss of potentially stored energy. Conversely, too little water robs power from the generators, which must be supplied from another source, possibly from Holyrood and thermal generation.

Reflecting those concerns, Nalcor described how the absence of a WMA would have dire consequences.  In evidence filed with the PUB, it stated:

“In the absence of a water management agreement, Nalcor would not even have advance knowledge of expected flows from the Churchill Falls facility to enable it to take steps to mitigate spillage through advance drawdown of the lower Churchill reservoirs. These outcomes are not consistent with maximizing the long‐term energy generating potential of the Churchill River… In the absence of a water management agreement, Nalcor would be required to utilize the water as it became available. Given the limited storage capacity in the Gull Island reservoir (approximately three to four days of maximum flow from the upper Churchill facilities), Nalcor would have to turbine the water and produce energy at the time that it was available; it would be required to “chase the flows” from the upper Churchill. Spills would be likely during the period of the spring runoff, resulting in wasted energy.”  (emphasis added)

Nalcor uses the larger Gull Island project to explain its case in the PUB submission. Because of its large capacity potential and scale economies, it was the preferred project until Premier Danny Williams’ ‘go it alone’ strategy facilitated the Muskrat Falls project. Muskrat has approximately one-third the design capacity of Gull Island and the reservoir is correspondingly smaller.

The effect of the small reservoir and uncoordinated water release from the Upper Churchill was also demonstrated by Nalcor in its PUB filings. Nalcor spoke to HQ’s right, under the Upper Churchill contract, to take allocated power in the first or the last 20 days of each month. Minimal water flows, during the day time, were modelled for the other 10 day period. The schedule during the low water period put Muskrat in a position where it was capable of producing only 170 MW (essentially an amount equal to the size of the Nova Scotia Block), leaving Nalcor with a significant power shortfall. 

The example gives dimension to the problem the WMA was intended to resolve.  Accordingly, one might anticipate a seamless narrative both in the evidence Nalcor gave the PUB and afterwards, when Hydro Quebec initiated the Court challenge, except Nalcor’s story is anything but seamless. 

Nalcor's WMA claims anything but consistent

Long before HQ formally contested the WMA, Nalcor was aware that HQ’s refusal to support the Agreement presented serious challenges.  The Island’s winter power demands have to be met.  The project needs cash flow from sale of the 4.9 terawatt hours (TWh) of scheduled power production bearing in mind the value of the energy in non-peak periods, as a surplus product sent to the export market (mostly Nova Scotia), is relatively small.

When a likely legal challenge offered every reason to slow down the sanctioning process, and to seek a Declaratory Judgement (a legal determination by a court that resolves legal uncertainty) Nalcor ignored the risk of proceeding.  In place of heading to Court, after its own voluminous evidence foretold disastrous consequences for both proposed Lower Churchill hydro projects, if the WMA was defeated, Nalcor back-pedalled, not on the Muskrat Falls project, but on the importance of the WMA.  Warning the PUB, in 2009, Muskrat would be required to “chase the flows” from the Upper Churchill Nalcor Vice-President Gilbert Bennett, by 2012, said in a Press Statement on October 22, 2012 “No agreement or consent by Hydro-Quebec is required to provide water management certainty for lower Churchill developments”. 

Yet, HQ's signature endorsing the WMA remained vacant and the provincial law that gave effect to the WMA remained cauterised by HQ's exclusive access to the Upper Churchill.

Nalcor’s new position also contrasted with the comments of President and CEO Ed Martin who had personally weighed into the issue, in January 2012, not that you would expect them to be at variance with sworn evidence presented to the PUB. 

At that time, Martin released a Statement giving rebuke to Ontario Energy Consultant, Tom Adams of Adams Energy.  A prolific writer and critic of the Muskrat Falls, Adams wrote an “Open Letter to the electricity consumers in Newfoundland…” publishing it on his Blog just as the Muskrat Falls project Reference Question given the PUB was under consideration.

Adams charged Nalcor with “vastly overstating the usable output from Muskrat Falls…”  The allegations followed Nalcor’s refusal to answer a question he had put to them seeking “the incremental stand-alone per KWh cost of Muskrat Falls”. Nalcor had replied: “The requested analysis does not assist consideration of the Reference Question”. It was a standard Nalcor response, one that effectively stymied information that did not lead to the Corporation’s desired outcome in the sanctioning process.

Adams’ performed his own analysis and commented that even as an integrated system, “water coming to Muskrat in June is useless for island consumers because the island is already spilling water” at that time of year.  During the winter months of Jan./Feb./Mar., he calculated, “the maximum output of Muskrat will be about 500 MW due to the seasonality of  water flow”. Among other allegations, Adams argued “…the annual output of Muskrat Falls is never going to get close to 4.9 TWh.”

Adams had said he would apologize if he was wrong. His comments constituted not just a significant broadside to Nalcor. They caused enough consternation that the Nalcor Chairman and CEO sought to have him pay up. 

“Your Blog displays a clear lack of understanding…of the Muskrat Falls development” charged Ed Martin on January 30th, 2012. “I’m compelled to correct the statements made by you, and request…the prompt apology…” Continued Martin: “I’m not sure if you are aware of legislation in our province that requires a water management agreement to be in place…The terms of the agreement which have already been established, requires Muskrat Falls and Churchill Falls to operate as an integrated system (and) provide…access to over 30 billion cubic meters of storage upstream in the Churchill Falls reservoir.”

Loose with the truth

The exchange between Adams and Martin is noted chiefly to further confirm, if confirmation was needed, that Nalcor’s reliance on the Upper Churchill via the WMA for Muskrat viability was absolute and that the single tool it had in its arsenal was provincial legislation which lacked the power of enforcement.  

For that reason Nalcor’s switch in tactics and its denial of the WMA’s importance, at the highest level, is simply perplexing - that is except if one discounts the long trail of deception over Muskrat that Nalcor has reduced to artistry.

Had Nalcor over-played its hand in the evidence it gave the PUB to secure a meaningless WMA? Or, was it being loose with the truth, as JM once opined, in its determination to obtain project sanction?

The questions are valid.

Readers will remember Nalcor also sought from their Consultants the very approval the PUB had denied them.  In this pursuit, suggested JM, Nalcor represented to both Manitoba Hydro International and to Navigant that the Water Management Agreement represented an unconstrained transmission system.  In other words, they represented the position that Muskrat had access to unlimited water storage (actually, its energy equivalent) via the Upper Churchill.  

Had the uncertainties of the WMA been revealed to those Consultants, would they still have been willing to support Muskrat as a viable project? 

It is hard to imagine on what basis they might.


Court Case involves other issues, too

So far, the implications of a failed WMA describes only one dimension of a far more complicated issue.  There are other supply issues, however, all of which the Upper Churchill reservoir is expected to resolve.  They relate especially to the high demand winter months and to commitments made under agreements with HQ, especially the GWAC. In addition, the Recall provision of the Upper Churchill Agreement limited the province to 300 MW of which, by 2015 only 80 MW was not drawn down.

Cabot Martin described the role of the Water Management Agreement to take power in excess of Recall from Upper Churchill, in winter, as “magical, pixie dust thinking”. This suggestion might have arisen during one of his more generous moments analysing the Muskrat Falls project.

WMA a concern in Nova Scotia

Concern over the legal status of the WMA concerned Emera and the UARB of Nova Scotia, too.

Indeed, one of the places to which Muskrat critics looked for insight into the structure of the deal was to evidence given at Hearings held by the Utility and Rates Board of Nova Scotia (UARB) because Nalcor played a niggardly game with information that might expose the folly of the project. Even there, during the public hearings on the Maritime Link, the UARB was skillful,  too, deflecting attention from an issue all knew would challenge Newfoundland and Labrador financially, if failure of the WMA left Nalcor with an energy shortfall.

The UARB was aware that Emera had contractually secured the Nova Scotia Block, justifying the Maritime Link for that Province, whether Muskrat ever produced a single KWh (the tie-in with the Bay d'Espoir power plant allayed those concerns). Likely, that is why part of Nalcor Vice President Humphries’ evidence was allowed to stay obscure during cross-examination at the UARB Technical Hearings, on October 28, 2013.  

Asked about the water management agreement, Humphries took his cue from the Nalcor CEO and answered the question in an obverse manner to Nalcor's pleadings before the PUB when it first sought the Water Management Agreement. Said Humphries: “water management will not materially impact the firm to average spread that we anticipate having post-2017”. Pressed on the point by a MR. RATHLE: “So the firm output of Muskrat Falls with and without the water management agreement is the same?” HUMPHRIES replied: “Yes. From an energy perspective, yes”. Asked by Rathle: “…can you explain…why that would be the case?” HUMPHRIES replied: No, I think that's beyond the scope of this inquiry here right now.”

The Nalcor Vice President had ducked the most basic question he could have been asked. His escape, under the cloak of  the Hearing's limited “scope”, held an eerie resemblance to the words “(t)he requested analysis does not assist consideration of the Reference Question” - the refrain that kept Tom Adams, David Vardy and dozens of others a safe distance from the truth about Nalcor’s obscure and doubtful claims.

As this was a Technical Conference, there were plenty of participants who were knowledgeable of such issues in the room who might have insisted that Nalcor’s man explain himself - except they needed no such disclosure. They knew the words “from an energy perspective” implied that if the WMA failed, production of the 4.9 TWh of electricity would likely get produced over the course of a year, but that Muskrat would often be incapable of scheduling Muskrat power generation when it was needed.

Why was the UARB unconcerned? Quite simply, NSPI, Emera’s subsidiary, had assured them water rights issues would not serve as an impediment to obtaining the NS Block. 

The UARB wrote that Emera subsidiary NSPI had confirmed “there were no risks to taxpayers from the non-delivery of energy by reason of any legal claim respecting the flow of water or arising from the reduction of water flow itself from the Churchill River”. The Report continued: “The contractual arrangements between Emera and Nalcor do not allow for the non-delivery of energy…Risks relating to Muskrat are borne by Nalcor.”

Enter the Anonymous "JM" to check Nalcor's "Loose Truth"

If the question of where the power would come from, in the absence of the WMA, did not concern the folks in Nova Scotia, it was certainly on the minds of critics in Newfoundland and Labrador. 

One of them was “JM”, the anonymous engineer who wrote extensively on the Muskrat Falls project. His articles included a Paper entitled “The Water Management Agreement and Peak Delivery to the Island“. He addressed a number of questions in an effort to seek clarity from Nalcor as to how the WMA would actually work, given the limitations inherent in the Upper Churchill Renewal Agreement. 

Though Nalcor had told the PUB, in 2009, that the Renewal Agreement altered the way CFLCo supplies energy to HQ, the claim was obscure to him as it was to the lawyers and others (including this writer) who were members of the 2041 Group.  We had repeatedly challenged Nalcor to show proof of its claim - without response. 

Such scepticism arose, in part, because prior legal agreements did not seem to bolster Nalcor’s case.  The 1961 lease act gave CFLCo the right to generate stored water in the Smallwood reservoir. The 1969 Upper Churchill Contract granted the right to HQ to the power capacity of the facility upon request. In addition, Part 5.2 of the Renewal Contract states: “The Firm Capacity shall be available at all times when Hydro Quebec has requested it.  The document adds “…whenever additional capacity can…be made available, such capacity shall also be available to Hydro Quebec on request.”

The 1969 agreement committed both energy and capacity to HQ. So did the Renewal Contract. The commitments are re-affirmed in the Guaranteed Winter Availability Agreement, too.  The GWAC provides “for maximum availability of all generating units at Churchill Falls during winter months”. CFLCo is compensated “for ensuring that 682 MW of additional capacity is available during the winter.”

In their totality, the agreements require that CFLCo make available to HQ approximately 4,100 MWs in the winter and 3,860 MWs in the summer subject to limitations of the 225 MW TwinCo block (as compensation for the closure of the Twin Falls plant which was closed in 1974 so that the water could be diverted into the Smallwood Reservoir) and the 300 MW Recall Block.

The power capacity of the Upper Churchill is 5428 MW. When transmission line losses (about 5%) are accounted for, the arithmetic suggests that, even in winter, there is potentially more than 500 MW of power capacity available to the party that has the rightful claim, assuming all 11 generating units which comprise the plant are operational.

Those numbers are important because we are afforded a glimpse into how Nalcor planned to access that surplus power, even if from an unlikely source. The comments were made in an interview conducted with political Blogger John Samms by Nalcor V-P Gilbert Bennett.  They especially caught the attention of JM took who took care to parse them in his Paper.

The first part of Bennett’s dialogue is notable in part for its inconsistency with the evidence Nalcor filed with both the PUB and with the Joint Federal/Provincial Environmental Panel. States Bennett:

Running at full output, Churchill Falls, would discharge about 2000 cubic metres per second into the Churchill River. Assuming no reservoir draw down, this level of discharge from CF would by itself provide about 630 MW of production at Muskrat Falls. We could run MF at a higher output level for a period of time and draw down the MF reservoir, or we could hold that capacity for reserve in the event of a maintenance issue, and dispatch our other hydro units in the Nalcor fleet. We always maintain reserve in the system, so we could keep it at Muskrat Falls as well as anywhere else. We currently make these dispatch decisions many times per day, responding to water levels, inflows, system load, maintenance issues, on the island. With the interconnection, MF/CF will be added to the mix. 

Drawdown of Muskrat reservoir not as simple as Bennett suggests

Bennett seems to be sure Nalcor has access to excess capacity and is assured the Muskrat reservoir offers any potentially missing power reserve through drawdown of the reservoir.  This resolution, of course, is not nearly as simple as Bennett suggests and not only because the Muskrat Falls reservoir is so relatively tiny.  

As JM reminds us  Nalcor, in filed documents with the PUB, “…clearly identify that the Muskrat Falls reservoir will be maintained at 39.0 meters to optimize the energy output from the falls”.

The issue of “drawdown” of the Muskrat Falls reservoir was also given attention by the Joint Panel, too, but for other reasons. Dr. Jeffrey Brooks of the Geological Survey of Canada, whose participation in the Hearings of the Joint Federal/Provincial Environmental Panel were most instructive with respect to the North Spur instability issue, recommended that “Nalcor establish a procedure for drawing down the Muskrat Falls reservoir to minimize the chance of triggering a large-scale earth flow”.

Dr. Brooks’ was referring to geotechnical issues associated with the project, particularly the problem of “quick clay” induced bank instability and risks associated with seismicity along the Churchill River.  He was concerned that “if they (Nalcor) draw the water down rapidly, there could be high pour water pressures that trigger some of these (bank) failures”.

In its final Report the Joint Review Panel stated: “In order to operate the reservoirs as efficiently as possible, Nalcor would keep the water levels at a fixed level for most of the year, avoiding the big changes that people have been used to seeing in the Smallwood Reservoir.”

Among other issues, the Panel was concerned about fish habitat and noted that “when there are competing uses of a river system, water should be formally allocated for ecosystem purposes (and) recommended that the Province develop environmental flow standards to be applied to the Lower Churchill Project.”  Another issue plaguing drawndown was that the Muskrat reservoir posed several ice-related problems.

Those considerable limitations on reservoir drawdown contrast with Gilbert Bennett’s assertions Nalcor had other options if it was prevented from applying the management regime for banked energy under the WMA. Indeed, Bennett most exemplified the absence of consistency as he lurches from one claim to another unmindful they are at times inconsistent with prior Nalcor evidence submitted to public bodies, under oath in the case of the PUB.

Nalcor pins hopes on excess power from Upper Churchill 

Bennett’s second comment, also recorded in Samms’ Blog Post, and reviewed by JM is even more revealing.   This time Bennett refers to the 1969 Upper Churchill Contract and advances the proposition that “Hydro Quebec is only entitled to their Annual Energy Base (which) limits the obligation of CFLco to deliver energy to Hydro Quebec”. It is in making this comment he discloses Nalcor’s primary objective in connection with the Upper Churchill and how Nalcor hopes to overcome even the limitations on available capacity imposed by the GWAC.  Says Bennett:

I agree with this – the GWAC is effective during the winter months. However, section 2.1 of the Renewed Power Contract entitles HQ to take the Continuous Energy in each month, including during the winter. Referring to Volume 1 of our application to the PUB for the water management hearing, the average production at CF is about 34 TWh. If we deduct the 2.36 TWh and 1.97 TWh for recall and TwinCo respectively, we’re left with approximately 29.7 TWh for HQ, or approximately 2.5 TWh per month. Interestingly enough, this means the plant will deliver on average just over 3470 MW for HQ + 525 for NLH/TwinCo (or 3995 MW out of 5428 MW) over the course of the month, meaning that while HQ can have ‘additional capacity’, they cannot have it all of the time, as they will exceed their energy allowance. This point ensures there will be lots of opportunities to withdraw stored energy from CF, even in the winter.

Bennett was giving definition to a view which Nalcor had communicated to the PUB, one in which it believed the Renewal Agreement modifies how “Continuous Energy” is defined.

“Schedule III to the HQ power contract (the Renewal Agreement) alters the manner in which the (Annual Energy Base) will be supplied to HQ by CFLCo”, Nalcor told the PUB.  “Upon renewal, HQ will become entitled to receive Continuous Energy. …as a result, HQ will be entitled to essentially equal amounts of energy during each month, after renewal”.

Article II of the Renewal Contract defines “Continuous Energy” in the context of calendar day/month/year but Article III, dealing with “Recapture” power limited “the power and energy agreed to be sold…” to the limits stipulated in Section 5.4 of the Agreement.  That Section set the “maximum withholding” to 300,000 kilowatts (300 MW) per year.

The reader is reminded that, under the Administration of Premier Frank Moores, the Government’s attempt to increase the Recall provision from 300 MWs to 800 MW failed in both the Newfoundland Supreme Court and Quebec Superior Court; decisions later upheld on Appeal to the Supreme Court of Canada. Nevertheless, Bennett paid no deference to that critical judicial outcome. Nor did he offer clarification as to the legal standing of 5.2 of the Renewal Agreement which states in part “…whenever additional capacity can…be made available, such capacity shall also be available to Hydro Quebec on request”.

It would be difficult not to conclude the expostulation by the Vice-President Gilbert Bennett that Nalcor can access electricity produced by the Upper Churchill in excess of HQ’s “energy allowance”, including that provided under the Guaranteed Winter Availability Contract, is pivotal to Nalcor's hope of giving the corporation a new source of revenue and to meeting the province's winter energy requirements in the future. 

But Bennett never took time to consider that the Quebec Superior Court might bar Nalcor such power access and stop the crown corporation from exercising the scheduling of water flows, too. Bennett and his boss, Ed Martin, never seemed troubled that the Court might render any provincial legislation governing the WMA completely irrelevant.

Hydro Quebec sees plenty over which to litigate

It is generally known that the Upper Churchill Contract is morally egregious; a condition only worsened under the Renewal Contract.  The rate per KWh of power sold to HQ in the twenty-five year renewal period, 2016 to 2041, will actually decline from 2.5 mils per KWh to 2.0 mils per KWh. All of the economic rent associated with the sale of electricity by CFLCo will accrue to Hydro-Québec; a condition which may, yet, imperil CFLCo’s solvency.

While this problem, along with the questions raised by Gilbert Bennett, spurs a variety of legal issues, on no account will they be addressed in greater detail here. The purpose of this narrative is essentially to raise the question whether Nalcor’s right to trade water in the Upper Churchill reservoir and to give itself access to that plant's excess power capacity is so clear and unequivocal that it need not have halted the Muskrat Falls project pending the legal clarity afforded by a judicial decision - a Declaratory Judgement.

Prior to Bennett’s disclosure, many pondered this question: if the WMA did not abrogate any of the rights of HQ under the Upper Churchill Renewal Agreement and the GWAC, why would HQ contest Nalcor’s interpretation of the Renewal Agreement in Court? In other words, what was left to argue over?

But, Bennett’s arithmetic on the Upper Churchill’s unutilized capacity confirms there is, if he is correct, plenty to argue over including much needed additional power during the winter months. 

In addition, the belief that CFLCo has the right to fulfil the Renewal Agreement in fixed monthly allowances, if upheld, assures Nalcor a level of predictability as to HQ’s demand schedule it is now denied.

QH’s legal challenge, therefore, is not isolated to whether the WMA can be legally enforced, but also whether HQ has first claim on the total capacity of the Upper Churchill until 2041.

Both players see a large prize at the Upper Churchill. Hydro Quebec may see the cost of failing to sustain its legal position as significant, but not nearly as much as might Nalcor. At stake for Newfoundland and Labrador is the very viability of the Muskrat Falls project.

Nalcor Allows Itself to be Suckered

HQ might have chosen to legally contest the WMA, in 2010, when the PUB first granted approval. But, it waited as Nalcor advanced the project. In fact, HQ did nothing until well after Premier Dunderdale formally sanctioned Muskrat Falls sanction on December 17, 2012.

Nearly seven months later, on July 22, 2013, having watched a NL government oblivious to risk and having made financial commitments, which by then had exceeded $2 billion, Hydro Quebec made its move.

HQ filed a Requête introductive d’instance before the Superior Court, in Montreal, not to contest the validity of the Water Management Agreement directly but to ask the Court to uphold how it defined its claim to the waters of the Upper Churchill reservoir. 

HQ claimed, as expected, that the 1969 Power Contract, both before and after renewal in 2016, gives it access to all of the power and energy generated at Churchill Falls, except for the 225 TwinCo Block (relating to the Iron Ore Company of Canada operation in Labrador West) and the 300 MW Recall Block.

In contrast to Gilbert Bennett’s assertion “that while HQ can have ‘additional capacity’, they cannot have it all of the time”, HQ stated that it has the “exclusive right to purchase virtually all of the power and energy produced by Churchill Falls Generating Station until August 31, 2041” as well as “the right to benefit from operational flexibility.”

The Company further asserted that “CF(L)Co's position is incompatible with several provisions of the Contract.” It stated: Hydro-Québec wishes to have the Court confirm that it will not be obliged to limit its requests for energy deliveries to fixed monthly blocks from 2016 to 2041.”

Nalcor’s immediate public response to QH’s legal action was terse.  In a press release dated July 26, 2013, it stated simply: “CF(L)Co has completed a preliminary review of the motion filed by Hydro-Québec in the Quebec Superior Court… The company remains confident it has made a full and accurate interpretation of the terms of the 1969 Power Contract and the 2016 renewal.”

2041 Group Warns Nalcor About Continuing Project In spite of Court Challenge

St. John’s lawyer, Bern Coffey, speaking for the 2041 Group, gave further context to HQ’s legal position but kept his remarks within the more limited framework of how HQ’s will challenge the WMA.  Said Coffey, the WMA “purports to alter HQ's contractual rights by allowing the scheduling of Nalcor production for CF(L)Co. In this context, ‘Nalcor production for CF(L)Co’ means Nalcor generating electricity at Muskrat Falls (or Gull Island) for delivery to Hydro-Quebec in Quebec. While Nalcor maintains the source of the electrons CF(L)Co delivers to Hydro-Quebec doesn’t matter, no one knows whether the courts would support Nalcor’s position.”

Coffey had raised the very issue which possessed Muskrat critics: it wasn’t the question of whether HQ was being petulant or greedy or whether it was foolishly arguing over which facility produced the electrons it had contracted to receive: at issue was the question of legal certainty for Nalcor.

Who would argue that the concept of the water management agreement seems sound, as long as either all the players are on-side or that the Courts have up upheld the plan as enforceable. Hence, the only question that really matters is this: just how fragile is Nalcor’s position, in practice? 

The point is underscored by Coffey: “no one knows whether the courts would support Nalcor’s position…. Without 'Nalcor production for CF(L)Co' and 'CF(L)Co production for Nalcor,' the WMA can't be implemented”.

The skillful lawyer and former Public Prosecutor suggested what any prudent Counsel might, especially given the size of the Muskrat Falls investment. Coffey advised “Nalcor should now either reach an agreement with Hydro-Quebec or have the Courts definitively determine the matter. Otherwise, Hydro-Quebec may in future institute legal proceedings, the outcome of which could be disastrous for Newfoundland and Labrador.” He added: “billions of dollars are at stake. Legal certainty is required, particularly in light of Hydro-Quebec’s past success in defending its power contract rights…(t)he point is simply that the outcome of any such legal proceedings is far from certain.”

The prospect of a new legal challenge, one that would have to be heard in the Quebec Superior Court, ought to have caused Nalcor to put the project on hold, pending judicial clarification of the issue. But that is not what occurred in spite of the fact that at all times Court decisions are uncertain. Out of the Quebec Superior Court they are slam-dunk. 

This Province has been shut out in three prior legal challenges on issues pertaining to the Upper Churchill and water rights, in the Newfoundland and Quebec Superior Courts, and the Supreme Court of Canada.  On what basis was Nalcor so certain it could win now, as it placed billions of dollars at risk?  

The inevitable Court decision will have profound implications. They may reach well beyond proof of whether the legacy over which Danny Williams salivated, and the combined hubris of politicians and bureaucrats, have imperiled this much heralded investment. NL’s claims to energy independence will be under threat, likely well into 2017, as any Decision of the Quebec Superior Court will most certainly be appealed to the Supreme Court of Canada.

Says lawyer Bern Coffey of the 2041 Group: “This application to court by Hydro-Quebec is going to have a significant influence…whatever interpretation the court chooses will define the limits of the water management agreement.” The Court will decide “whatever the renewal contract ultimately is interpreted to mean (and) how the water management agreement can be applied, if at all.” 

Will Muskrat be the "End Run" Williams Promised?

Muskrat Falls was “sold” to the public on the basis that it would produce 4.9 TWh of electricity per year, that it offered a Cumulative Present Worth (CPW) advantage over the “Isolated Island” option by $2.2 billion. 

Cost overruns and the drop in the price of oil, Holyrood’s feedstock, long ago destroyed this claim. Eventually, the Courts will determine if Muskrat is worth even less; if Muskrat will be capable of supplying the Island’s off-peak requirements let alone the winter demand, or Labrador mining to which commitments, and then some, Nalcor tied the project in its all-out effort to justify project sanction.

It will be a sad irony if, rather than doing an "end run" around Hydro Quebec, Muskrat Falls comes under its thumb, too.

Even sadder is that one group of politicians and bureaucrats were willing to ‘roll the dice’ in a Quebec Court, risking billions of dollars of public money.

How can we not conclude, considering all the risks which have been described, that the lawyers appearing before the Quebec Superior Court will be representing fools at the Bar?

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9 comments:

  1. A cohesive piece of work Des.

    Perhaps Nalcor plans to force CFLCo to apply the WMA (and then deal with the consequences through the NL courts).

    Ultimately, the Supreme Court of Canada will again decide the case (and I would not bet even one month of my pension cheque, yet alone BILLIONS of taxpayers dollars, on a decision that supports Nalcor's claims). Maurice Adams

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  2. A sound assessment essentially predicting the outcome from the Quebec court. No wonder Dunderdale is now silent and will take no questions on MF. She stated on CBC TV that it takes time for true facts to be separated from the coloured facts! Guess we know who were the champions of the coloured facts.
    Welcome back Des. Looking forward to your view on the latest Liberty Report, where true facts keep coming. Winston Adams

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  3. So, what are the recently elected MPs doing to correct such inequity amongst struggling provincial power utilities? Liberals unit for common cause!

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  4. Hey Des,
    Great article! what are your comments around the Wangersky article the weekend past?

    http://www.thetelegram.com/Opinion/Columnists/2016-08-27/article-4623527/Russell-Wangersky%3A-Ready-for-round-2%3F/1

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    1. Could this work?

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    2. Wangersky is offering bad legal advice to continue beating the nationalist NL drum. Truly disgusting coming from a so called investigative journalist that asked no questions about this back handed attempt to take control of water management that the courts have clearly outlined.

      The peril this stunt puts on rate/taxpayers deserves to be widely exposed. Thanks Des for your informative post.

      Wangersky publishes bad gruesome fiction to avoid publishing the gruesome truth unfolding in his province and on his beat!

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  5. TwinCo's 225MW and 300MW Recall power, did Nalcor ever research the cost of building just the Labrador Island Link transmission system so the entire Province would have access to UC power?
    Only 40% of MFs rated capacity is required to replace Holyrood, the remaining 60% was always going to be sold fractionally to what NL ratepayers would be paying.
    Some of the loudest MF cheerleaders have said HQ won't sign a 25 year PPA with Hydro based on ideology or they would charge an arm and a leg to NL. These are also the same loudmouths that said no O&G company would sing a long term supply contract for natural gas for Holyrood's replacement.
    New power won't be required until 2036 in NL, 2 decades later then the brain trust at Nalcor/PCs sold MF on. 20c kWh power by the 2020s when half of all taxes filed in NL are under $30,000 will see quite a steep demand decline due to rate shock. Proponents ignored the personal cost to ratepayers, 8c kWh increase from our current 12c kWh is $1400 more a year for the same 62GJ of power currently consumed per household.
    Nalcor presented absurd demand forecasts of 10500GWH by 2041 and 12000GWh by 2067, 2010s demand was 7600GWH. Long Harbor (Vale Inco) was the only confirmed new power at 77.6 MW a month in 2017, where does the remaining 2000GWH (+25% demand increase by 2041) come from exactly?
    Delaying MF until all the legal ducks were lined up would have staggered major construction projects in NL thereby lowing labour costs since demand would level out, not skyrocket as they have.
    By the time the court declarations/rulings were made the price of oil would have started its great fall, $2.2B LCO alongside HQs WMA rights remaining = the project DoA.

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  6. Does anyone know how a loan guarantee could be approved/granted with the WMA uncertainty? There's no way a bank is going approve a mortgage if you don't have clear title to the land or municipal approvals to build. It's like Ottawa didn't exactly have our best interests at heart. Then again, why would they? Thanks Danny.

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  7. Thank-you for this detailed explanation! Without knowing the information, that you have shared, Newfoundlanders felt in their bones that this project was folly and as more lies and dishonesty became apparent, it was all but assured that Muskrat Falls and the Nalcor officials and government politicians were all either corrupt or do not care about our provincial finances. Your explanation has now exposed the truth so that all can see and understand that Newfoundlanders have been played as fools and pawns in this big high risks game.

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