PPA: ABSOLUTE, UNCONDITIONAL AND IRREVOCABLE

The Power Purchase Agreement (PPA) is not a sexy subject though it is important; far more than suggested by the negligible attention it received two months ago.

The PPA defines the terms, conditions and amounts ratepayers are obligated to pay Muskrat Falls Incorporated, the Nalcor subsidiary holding the generating assets of Muskrat Falls.  A separate Agency was established for the purpose of holding and financing the Labrador Island (LIL).  It is not clear if the 51 years of “Base Block Payments”, rising from $148.5 million in year 2 to $933.3 million in year 50, include the transmission costs, too,  or whether we ought to expect a second PPA.

This PPA details, in 196 pages of legalese, a host of obligations on ratepayers via Newfoundland Hydro (NLH).  In typical Nalcor fashion, no details accompanied its release.

Your attention is drawn to Section 4.2(C) (d) (pp. 37-38) regarding “Base Block Payments” which the PPA calls an “Irrevocable Obligation”.  It states:

“Notwithstanding any other provision of this Agreement, including Section 15.1, until the date on which the Initial Power Purchase Agreement Page 33 of 76 Financing is Paid in Full, NLH’s obligations to make the Base Block Payments shall be absolute, unconditional and irrevocable, and shall not be subject to any reductions under any circumstances whatsoever.” (Emphasis added).

Fundamentally, that means Nalcor can lose the Water Management case now before the Quebec Superior Court, the turbines coming from China can seize up, the water can dry up but your obligation to pay is “absolute, unconditional and irrevocable…”

Just possibly, the Consumer Advocate might awaken from his blissful slumber and report to ratepayers, on the implications for them, of this and many other parts of the Agreement.

The PPA was released on June 26^th, 2014 by Nalcor following months of demand by critics of the project, though it could have been made public seven months earlier on November 29, 2013, when Hydro and Muskrat Falls Inc. officials executed the Agreement.

The payment schedule shows just how seriously back-end loaded is the financing structure of the project. Not only will your children and grandchildren think you are fools, you can forget any notion that once Muskrat is paid off they will have any rights to cheap power. 

For those and other reasons, you ought to have been given the courtesy of a briefing as to the PPA's contents.

Alas, you were treated like dolts…again!  

The Telegram, like other media, noted CEO Ed Martin’s comment at the Nalcor AGM regarding its imminent release:

Said Martin: “There’s two or three more pieces I’d like to have, but I’m finding that it’s probably not material enough to wait on. We need to tell the people what’s happening. We need to get the facts out there". 

If you didn’t know better, you might think the Nalcor CEO was Saul, on the road to Damascus.

Ed Martin experienced no conversion from his secretive ways, however.  “Getting the facts out there”, for him, meant dropping a 196 page legal document on Nalcor’s web site, practically in the dead of night, without as much as a “Howdy Do!” to ratepayers.

A Press Release from Premier Tom Marshall’s office designed to provide cover for the latest cost overrun of $800 million added this single innocuous sentence:

“Also released today was the power purchase agreement between Hydro and Muskrat Falls Corporation available at https://muskratfalls.nalcorenergy.com/newsroom/reports/”

That was it! There was no annotated document by Nalcor explaining key points in language that lay persons might understand; not even as much as a summary document for the Press, drawing attention to the key matters they or ratepayers might give close attention.

Not a single word was offered by the Premier, the man who loves to feign openness and transparency. 

 The public is implicitly told: ‘if you want to find out more, read this and figure it out for yourself’!

The whole media (all of them!) ignored the document.  The Opposition Leaders were equally disinterested.

To be fair, neither group was expected to parse every clause of such a complicated legal agreement.  But they can read. They can ask questions. They possess the ability and the stage from which to demand explanations and interpretations.  They have obligations: the Official Opposition by virtue of its constitutional role; the media less formal, but fully recognized and supported, too. 

Virtually two months have passed since the PPA was released; lazy scribes seem to have joined vacationing politicians.

Little wonder that Ed Martin and Tom Marshall feel impervious.    

It was no different with the Energy Access Agreement (EAA); this was the Agreement demanded by the Nova Scotia UARB, for virtually all of NL’s surplus power.  It was the ‘gun to Nalcor’s head’ condition for supporting the Maritime Link.  The UARB noted the first Agreement was deficient by $706 million to $1.422 billion. 

Though Nalcor quickly bellied up to the bar for a second time, nullifying the benefits of the Federal Loan Agreement, the decision received as much attention from the media and the Opposition as did the PPA.  

The fact that the PPA isn't written in baby talk may be why the public doesn’t get told “…low water runoff into the Churchill River...” (P.8) is a Force Majeure event under the PPA but such problems of hydrology must not be permitted to impact Nalcor’s commitments to Nova Scotia under the Energy Access Agreement.

With a Tory Leadership contest in play, what better time for both groups - the media and the Opposition - to test the three contenders and their knowledge of the contents of a document to which the Provincial Cabinet has given approval. 

As Cabinet Ministers, Steve Kent and Paul Davis should be eager to display their intellectual prowess and provide justification for the PPA’s construction.  As a former Chair of Newfoundland Hydro and a lawyer, John Ottenheimer would find the material familiar, too.   

Perhaps, all three Candidates might inform us why after the 50^th debt payment of $933 million is made, Newfoundland Hydro is not afforded any rights to purchase Muskrat power and is free to cut a deal with a third Party (CLAUSE 13.3 page 56). 

The Clause states, in part, “Unless expressly provided in this Agreement, if no agreement is reached by Muskrat and NLH (for the purchase of power), this Agreement shall not be extended, other than as contemplated in Section 13.3(a) and the matter shall not be referred to resolution pursuant to the Dispute Resolution Procedure.”

That Clause, alone, invokes the possibility that Muskrat is a far worse deal than the Upper Churchill.  Then, too, Muskrat Falls Corporation is being financing separately AND faces the biggest overruns especially on the North Spur.  Someone does have a perverse idea of “risk” and “reward”!

One thing is abundantly clear, however. The construction of the PPA does not contemplate Muskrat remaining a state owned enterprise (SOE) for long.

There are other issues with the 196 page PPA, too.

Nalcor fails to offer proof as to how the “Base Block Payments” are generated or the capital amount which underpins those payments; nor does it provide a sensitivity analysis as to how cost overruns will impact the revenue stream demanded of NLH. In addition, as stated at he outset, it is not at all clear if this is the only PPA to be generated.

On the matter of cost overruns, Section 2 of Schedule 1 provides that “(t)he Base Block Capital Cost Recovery is recalculated on or about the Commissioning Date”.  That is a free-ride for Nalcor incompetence, for sure.

When Ed Martin disclosed that the most recent cost overruns had reached an additional $800 million, he suggested that the impact on ratepayers was another $8 per month. Given the PPA’s 196 pages of legalese it does not seem the Bondholders are putting much stock in Ed Martin’s word.  Ratepayers shouldn’t either. 

Indeed, we have no idea how annual inflation will impact the rates, changes in load forecasts, Nalcor’s demand for an 8.4% return on capital, or if “Base Block” numbers have been adjusted for anticipated export revenues, however miniscule. We have only Ed Martin's suggestion rates will increase 1-2% annually.

If the public were given proper transparency, it would not have to rely on Ed Martin’s “spin” to determine the impact of the next ‘overrun’ on power rates; the Power Purchase Agreement would show the method of calculation. 

But, the PPA is not about you; its purpose is simply to ensure that you pay the levy Nalcor demands.

‘No project has ever had as much transparency and accountability as Muskrat Falls’ was Kathy Dunderdale’s refrain; one now echoed by Tom Marshall. 

Such speak is a corruption of those very terms. Add the PPA to your list of examples.

And, when Ed Martin says "we need to get the facts out there"; you had better run for your legal dictionary. You'll get no help from him.