QUEBEC APPEALS COURT BREAKS HQ STRANGLEHOLD ON MUSKRAT

The Decision by the Quebec Court of Appeal to overturn the Quebec Superior Court and grant CFLco the right to sell power in excess of the “Annual Energy Base” (AEB) seems to have reduced the province’s stress level. The obligations of CFLco in relation to the AEB is integral to the issue of water management and the abilty to efficiently run the Muskrat Falls plant. 

The Annual Energy Base was established in the original Upper Churchill Contract and states an amount of energy used to calculate minimum monthly payments by HQ to CFLco (and “ensure(s) a certain degree of stable revenue for CFLCo.”. This figure is also in dispute (footnote 53 of the Decision) but the amount is thought to be 28.97 million MWh — the figure used in three successive Nalcor Annual Reports.

The Appeals Court Decision, drafted by Justice Jacques Chamberland — who is described by one lawyer as “one of the most highly regarded jurists in the Province” of Quebec — makes CFLco's ability to manage the water flows on the Churchill River possible (as long as the AEB is supplied to HQ).

Quebec Court of Appeal Justice  Jacques Chamberland

A Water Management Agreement is fundamental to efficient power production when there are two or more hydro plants operating on the same river. HQ had instructed its Directors not to approve the WMA.

By most accounts, the Appeals Court has given CFLco a clear victory though it must be viewed in the context of the quantity of excess power available after the AEB is satisfied. The Court stated that, under the terms of the Upper Churchill Renewal Contract, Hydro Quebec is limited to certain amounts of electricity rather than all of the output of the Upper Churchill plant (apart from the 300 MW Recall for domestic NL purposes and the 225 MW Twinco block for IOCC).  The relevant section of the Decsion reads:

“Hydro-Québec does not have the exclusive right to purchase, and receive, all of the energy produced by the Upper Churchill power plant,” Justice Jacques Chamberland wrote. His conclusion read “… I would allow CFLco’s appeal in part and declare, first, that HQ’s right to the energy produced by the plant is limited annually to the value of the Annual Energy Base… and, second, that, since September 1, 2016, there is nothing preventing CFLco from disposing of the power associated not only with the Recapture and Twinco blocks, but also with the energy produced over and above the energy contemplated by the concept of Annual Energy Base, provided, however, that CFLco satisfies its commitments to HQ.”

What had occurred at the Appeals Court to effect such a different outcome than that decided by the Trial Court?

The Appellant Justice stated that the trial Judge had erred in “the characterization of the [Upper Churchill] contract” which decision, he said, “is not without its consequences.”

Essentially, he concluded that the Trial Judge had, in treating both the original and the Renewal Contract “as an inseparable contractual whole created the risk of commingling the terms and conditions applicable to one period with those applicable to the other…”  - in other words the original 40 year contract and the current or Renewal Contract. The Appeals Court painstakingly compared the two and while deferring to the Trial Judges on matters of fact, differed with their interpretation of the Renewal Contract. 

Still, questions remain. The Upper Churchill plant was designed for an average of 34.5 TWh; however, since its commissioning the plant has produced more than 41 TWh. Sources state that a combination of good hydraulic and plant availability (good maintenance) are key factors in achieving this record. There are also years when the plant has produced less than 30 TWh, a figure very close to the current AEB.

In this context it is important to note that the Appeals Court confirmed HQ’s “… right to an operational flexibility similar to that it enjoyed until August 31, 2016…” when the Renewal Contract took effect. Operational flexibility gives HQ the right to schedule its power requirements according to a predetermined plan, incorporate seasonal changes, subject to certain obligations, and otherwise to postpone deliveries of power.

One hydro engineer questions whether during years when production allows little slack beyond the AEB implementation if a functional WMA is still possible.

Then, too, there exists the likelihood of a further Appeal to the Supreme Court of Canada, this time by Hydro Quebec, which exposes the Contract to other interpretations.

There are other issues worthy of note, three in particular:

1. The AEB is important in part because it defines the amount of excess power available and the latitude CFLco possesses to deal in power sales after HQ’s “operational flexibility” requirements are met. Footnote 53 of the Decision states that, “At the hearing, the parties told the Court that they were in disagreement regarding the value of the Annual Energy Base as of September 1, 2016, although they had agreed, in May 1969, to set it at 31.5 billion kilowatt hours (31.5 TWh) at the start of the first 40-year period.” The footnote also describes the Court’s position, even if somewhat oddly: “This is a dispute we are not required to rule on within the scope of the case presently before us and which we hope the parties will be able to settle amicably.” Likely, CFLco and HQ will have a few matters to discuss even when the legal dust settles.

2. The Decision by the Appeals Court does nothing to excuse Nalcor or the Dunderdale Government for having sanctioned the Muskrat Falls Project based on essentially a fundamentally “fake” Water Management Agreement which it cooked up and which, without the Quebec Appeals Court ruling, would have remained meaningless

Nalcor knew, as soon as the Hydro Quebec Members on the CFLco Board refused to sign off on the WMA, that a legal challenge was a certainty. They proceeded with project sanction anyway, when more sober management would have sought judicial clarity on the issue. It is a matter that the Commissioner will have to consider along with $300 million in cost overruns — about which it failed to inform at least some in Government - and the public - also prior to sanction. Later deceits may be adjudicated, too.

3. The institutional lie: from the time critics called for a halt to Muskrat pending judicial clarity on the WMA, VP Gilbert Bennett could be heard stating that the legal case and the WMA were totally unrelated. Of course, Bennett was all alone. Stan Marshall offered at least a partial correction to Gilbert's assertion when he told NTV following the Quebec Superior Court Decision: “Would have been better if we had won. And there are some issues but with a minimal amount of cooperation from Hydro Quebec, which I fully expect to have, I think we can operate MF in the way it was designed to…” If Bennett was right, why was the Commission of Inquiry so careful that any comment on Water Management was restricted to a single in camera session? Wasn't it because Nalcor had warned the Inquiry that public analysis and comment on water management issues might impact the Court case?

And what did Premier Ball say about the Appeal Court’s Decision? He expressed relief stating: “We now know that we, as Newfoundlanders and Labradorians, that CFLco now will be able to manage the water way. This decision today gives CFLco the rights to manage water on the Upper Churchill, therefore not having a negative impact on Muskrat Falls.” 

Strangely, he didn't even mention Gilbert Bennett!