Upper Churchill - The Unexplored Alternative (1)

Upper Churchill Power – The Unexamined Alternative

Upper Churchill – The Unexplored Alternative

A Discussion Paper on Muskrat Falls

Volume I

By:

JM

August 2012


A Discussion Paper Page 1

Part I: Introduction

On February 29th

the author submitted a 173 page written presentation to the Public Utilities Board entitled

“Muskrat Falls – The Benefits of a Phased Development” [Ref. 1] which attempted to provide a plain English

assessment of the of project. Following a critical review of NALCOR’s submission, the presentation concluded with

a recommendation to construct the Labrador Island Link (LIL) per the current project schedule, but to delay the

construction of the Muskrat Falls Generating Facility (MFGF). The reasons for proposing the delay to the MFGF

were simple and remain relevant:

1. A fixed electrical transmission link to the mainland Canada is required to provide long term reliability of

the island energy supply. If the link is not built now, it will likely be built prior to the expiry of the Upper

Churchill Power Contract in 2041. Although the transmission link would still be in excess of 2 billion

dollars, it would represent a legacy from our current offshore prosperity.

2. Immediate completion of the LIL would permit access to the Upper Churchill recall power which is

presently being wheeled through Quebec. Due to the low final sales price, and the transmission tariff

payable to Hydro-Quebec Transenergie, this energy is not providing maximum value to the province.

Redirected to the Island this energy would help meet our domestic needs until the next decade.

3. A delay to the MFGF would allow additional time to confirm the energy demand profile for the island,

including the future of the Corner Brook mill. The variability in the island requirement is a primary risk

associated with the Muskrat Falls project. In their final report Manitoba Hydro were very clear in

concluding that if the Corner Brook mill closed the economic preference for Muskrat Falls would

evaporate [Ref. 33]. A combination of a 25% increase in capital cost and the closure of the Corner Brook

mill would result in the Muskrat Falls option being more expensive than continued oil generation. A

phased development would mitigate this uncertainty.

4. A delay would minimize the overlap in the construction schedule with the other ongoing resource

projects. This would ensure maximum opportunities for Newfoundland workers, and the supply chain. By

completing the MFGF following the Hebron and Husky wellhead platform projects all project costs will be

potentially reduced.

5. A delay to the MFGF would permit the verification of the subsea cable prior to the de-commissioning of

Holyrood thermal facility.

6. It would also allow the Labrador mining energy requirements to be factored into the planning forecast. It

is unclear to the Author how Muskrat Falls can service the Emera block, the Labrador mining potential,

and the expected growth in the island demand. There will be insufficient energy to meet the peak

demands in winter, resulting in a continued reliance on thermal generation. A delay to Muskrat Falls will

allow the full potential of Labrador mining to be known prior to committing 167 MW of peak period

power to Nova Scotia.

7. The Labrador Link would facilitate the option to purchase power from Hydro-Quebec to meet the island

needs. If not from Hydro-Quebec there could be potential purchases from other North American utilities

using the open access provisions of the United States Federal Energy Regulatory Commission (FERC).

With the de-regulation of the North American markets other generation utilities are permitted to transmit

power over the Hydro-Quebec grid subject to a tariff.

It is clear to most pundits that Nalcor’s decision making has been very heavily skewed towards the Muskrat Falls

alternative. The Terms of Reference for the Public Utilities Board was limited by the Government to 2 options

only, namely; (i) Muskrat Falls Infeed and (ii) the Isolation Option premised on continued oil fired thermal

generation. Nalcor’s investigation into other options such as power purchases from outside jurisdictions and

natural gas were qualitative only, with no economic models disclosed for public review. These options were



essentially screen out by Nalcor at the Decision Gate 1, which was completed in February 2007 [Ref. 34]. This was

before the shale gas revolution currently underway in the United States [Ref. 35].

Therefore, the Author’s recommendation to proceed with the construction of the LIL, with a delayed MFGF, was

qualified on the completion of a full-costed screening assessment, including the following options:

1. Small scale gas pipeline to shore for electricity generation at Holyrood.

2. LNG imports for electricity generation at Holyrood.

3. Construction of the Labrador – Island Link (LIL) to gain access to recall power, combined with small hydro

and limited thermal generation.

4. Construction of the LIL to utilize the recall power with supplemental energy requirements from the Upper

Churchill through a power purchase agreement with Hydro-Quebec.

Following the PUB’s final conclusions [Ref. 22] the government responded appropriately and committed to

completing a cost comparison of the other primary options identified during the PUB hearings, specifically (i) LNG

imports, (ii) gas to shore and (iii) increased wind resources [Ref. 23]. This various reports studying each of these

options will be issued for public review prior to the Fall debate within the House of Assembly and the DG3 project

milestone. However, Government at that time did not commit to further study of potential power purchases from

outside jurisdictions, specifically Upper Churchill power from Hydro-Quebec.

This discussion paper will further examine the alternative of building the LIL to connect the island to the North

American grid, and in doing so gaining access to the recall power presently available. An economic comparison is

presented if the additional energy requirements are met by power purchases from either the Upper Churchill or

other North American utilities at market rates. It must be noted that this is written in the context of “bridging the

gap” to 2041 to when it is assumed that there will be sufficient energy available from the Upper Churchill to meet

our demands for low cost energy. Although the costs of the MFGF and the LIL are reputed to be increasing, the

economic models contained within this essay are based upon the DG2 numbers presented by Nalcor within their

November 2011 submission to the Public Utilities Board.

Part II: The North American Energy Market – A Changing Landscape

As I have noted, the National Energy Board of Canada has ranked the Lower Churchill as the lowest cost source of

hydroelectric power on the North American continent. This, combined with the long term price stability of hydro-

electric power, places a special premium on this power

Brian Tobin, Speech to New England Governors, 1997 [Ref. 2]

It is often quoted that the more something is said the more it is believed. It is fair to say that this can be applied to

the development costs of the Lower Churchill. For the better part of four decades Newfoundlanders have been

indoctrinated with the notion that the Lower Churchill is the lowest cost power within North America. It is a fact

that was not often challenged in the folklore of Newfoundland. For the better part of the last four decades this

may have been true. However, the energy market of North America is in a period of renewal fuelled by the

emergence of shale gas. The conclusions of the NEB should therefore be revalidated.

Whether it is Romaine in Quebec [Ref. 24], or Wuskwatim in Manitoba [Ref. 25] it is not a good time to be building

hydro dams in North America. The reality for the current incarnation of the Lower Churchill Project is that there

are significant challenges. From a cost side, the local resource based economy is booming and the construction



costs for such a project is relatively expensive, and increasing. This will certainly be one of the reasons how the

government will explain the cost growth between the DG2 and DG3 estimates. Of equal importance the final

export market for any such hydro project is evaporating. Since the financial crisis of 2008 the energy markets

within the target region of the North Eastern United States have contracted, with the energy price presently

trading at 50% of the highs of 2008.

Figure 1 provides a summary of the day ahead pricing for the North East United States. During the early planning

of the Lower Churchill project in 2006-2008 the wholesale electricity costs in the final markets remained quite

robust above the $75/MWhr range. Since this time the steady decline in natural gas prices has resulted in the

mirrored reduction in wholesale electricity rates.

Figure 1: Day Ahead Pricing – All Hours [Ref. 3 – FERC]

The optimist amongst us could view this as a short term market correction, and that electricity prices and natural

gas prices will both escalate to rates seen prior to the financial crisis of 2008. Although the eventual export of LNG

from the United States will cause gas prices to increase, it will not be immediate. This is reflected by US Energy

Information Administration (EIA) who have predicted that wholesale energy prices will remain relatively stable in

the period to 2035 [Ref. 4]. The EIA prediction for energy prices is included in Table 1 for both present day dollars,

and nominal or real escalated costs. It is clear that energy prices are forecasted to have negligible real growth in

the period up to 2035, and that they will be generally less than the peak pricing experienced from 2000-2008.



Table 1: EIA Energy Price Predictions [Ref. 4]

Although Muskrat Falls is intended for domestic needs, the development has to be viewed in the context of the

greater North American marketplace. We can not be blind to the significant reduction in energy prices within the

Northern US which has occurred in the last 5 years. Muskrat Falls, and discussions about the future potential for

Gull Island, must also be filtered through the economic reality of the relatively stable North American energy

market, both present and predicted.

When considering the option to use Upper Churchill power to supply the island market it must also be

remembered that the Labrador power presently being exported by Hydro-Quebec into the United States is pegged

to these ISO-New England and FERC projections. In 2011 Hydro-Quebec received an aggregate of $54/MWhr

compared to $82/MWhr in 2010 [Ref. 5] for energy it exported. This downward trend is expected to continue into

2012.

The reader may argue, as Minister Kennedy has, that Upper Churchill Power is not available and therefore the

North American pricing benchmark should not be considered valid. I will address this in subsequent sections of

this essay. However, for the information of the reader the next section will provide a comparison of energy prices

from the proposed Muskrat Falls project to other markets within the North American jurisdiction. Is the Lower

Churchill the lowest cost undeveloped power within North America? To truly understand if Muskrat Falls

represents the lowest cost alternative we must compare it to using Upper Churchill power which is either

purchased at market rates or obtained by some other means. This was a clear omission from the work Nalcor

submitted to the PUB as part of the Muskrat Falls review [Ref. 34].

Part 3: Muskrat Falls – The Lowest Cost Power in North America?

Within the PUB process Nalcor did provide information concerning the cost of the generation and transmission

components of the project. RFI-KPL-27 Rev. 1 provides the most succinct summary of what the final wholesale

costs would be to the Newfoundland ratepayer [Ref. 6]. Within these calculations Nalcor have included the cost of

the transmission line from the existing Churchill Falls plant to the Muskrat Falls facility within the MFGF

component costs (Page 6 – Column 2). To provide a true comparison to the North American benchmark price the

transmission component should be transferred into the LIL transmission costs (Page 6 – Column 3). Appendix 1

contains a summary of this calculation with the resulting unit cost on a dollars per megawatt hour basis ($/MWhr).

Figure 2 provides a summary of (i) the cost to generate electricity at Muskrat Falls, (ii) the costs to transmit the

energy to the island of Newfoundland and (iii) the total wholesale price to the Newfoundland consumer. It is clear

that within the period to 2035 that the Newfoundland consumer will be paying a premium for Muskrat power

when compared to the EIA projections for wholesale energy in the United States.

Supply, Disposition, Prices, and

Emissions 2010 2015 2020 2025 2030 2035

Growth Rate

(2010-2035)

(2010 cents per kilowatthour)

Generation 5.9 5.6 5.7 6 6.1 6.4 0.30%

Transmission 1 1.1 1.1 1.1 1.1 1.1 0.30%

Distribution 2.9 3 2.8 2.7 2.6 2.6 -0.50%

(nominal cents per kilowatthour)

Generation 5.9 6 6.7 7.7 8.7 10.2 2.20%

Transmission 1 1.2 1.3 1.4 1.6 1.8 2.20%

Distribution 2.9 3.3 3.3 3.4 3.7 4.1 1.40%



Figure 2: Muskrat Falls Energy Cost Compare to EIA Benchmark

Nalcor are correct when they argue that due to being an isolated island it is not fair to compare us to the

continental United States. This may be true when considering the cost of transmission only. However, there is

presently 5400 MW of generating capacity in Labrador, part of which is being sold through the Hydro-Quebec grid

to the North American market. Therefore, it can be considered entirely reasonable to compare the Muskrat Falls

generating costs to that of the potential export market, and the North American benchmark.

As Figure 2 so effectively communicates Muskrat Falls power will be some 20% more expensive than the EIA

wholesale prediction. This in itself causes the author some concern. But there are several other factors to be

considered:

Figure 2 is based on DG2 cost estimates. It is rumored that the DG3 estimates could be 37% higher, which

would further widen this gap [Ref.19].

Only 40% of Muskrat Fall’s power is used initially. If the growth on the island does not follow the

projections, the cost on a $/MWhr basis will further increase under the take or pay arrangement

proposed by Nalcor. The final incremental cost to the Newfoundland consumer is proportional to the

amount of energy sold on the island. Energy sold to the Labrador mining industry, or the US markets will

not substantially reduce the final rate to the island consumer and will not effectively mitigate the risk.

There is 1400 GWhr of Recall energy which is presently being wheeled through Quebec. The low sales

rate in New England, minus the tariffs payable to Hydro-Quebec, ensures that this energy is not providing

maximum value to the people of Newfoundland and Labrador.

Within the next 10 years until the provincial demand grows there seems to be a clear advantage to using existing

Upper Churchill power, even at market rates, rather than building the Muskrat Falls facility. Although Nalcor have

justified the Muskrat Falls generation project by utilizing a 50 year economic review period our net energy

shortfalls will only be until 2041 when the Upper Churchill Contract expires.



To understand the potential upside with the utilization of Upper Churchill the Author has taken the data presented

within RFI-KPL-27 and reformatted based on the energy being hypothetically available at market rates. General

assumptions in this calculation are as follows:

The LIL transmission costs and the costs for the transmission facilities from Churchill Falls to Muskrat Falls

are as per Nalcor’s DG2 submission.

Recall power is available now until 2041 at a cost of $2.50/MWhr. It should be noted that within Nalcor’s

presentation to the PUB the recall energy is also included within the expansion analysis for the Infeed

option [Ref. 1]. Therefore this assumption is no different than what was assumed by Nalcor.

Upper Churchill power is available at market rates. This is assumed to be $63/MWhr in 2017 and

escalated at 2.5% each year until 2041.

There are 2 options shown for total costs post 2041. The first assumes power is available at

approximately 70% of the market rate, and escalated at 2.5% per year. This reflects joint ownership of

the Churchill Falls facility and an indicative sales rate post 2041. The second option assumes that the

energy is available at $20/MWhr, and escalated at 3% per year. This reflects the potential price under a

“Cost of Service” model should the facility be regulated by the Public Utilities Board.

For option 1 the reader should be reminded that as NLH own 65% of the CF facility they would be entitled

to the same percentage of the profits. The profits realized from the higher sales price would be divested

to the shareholder (Nalcor) through a dividend.

Figure 3 provides a summary of the annual revenue requirements for the following options (i) the Muskrat Falls

plan (ii) LIL + Upper Churchill at market rates and (iii) LIL + Upper Churchill at market rates until 2041 when energy

costs are regulated. This chart clearly indicates that there is a considerable long term saving to the Newfoundland

consumer should Upper Churchill power be available at even market rates. Discounting this annual revenue

requirement over the 50 year period, to 2010 dollars, yield the results provided within Table 2. The results are

provided for a discount rate of 8% which corresponds to Nalcor’s cumulative present worth analysis presented to

the PUB, and for a discount rate of 2.5% which reflects a nominal inflation rate.

These numbers establish that considering the cumulative present worth method the Upper Churchill power

purchase alternative has a ~1 billion dollar advantage compared to Muskrat Falls infeed option. This would be a

3.2 billion dollar advantage compared to the thermal isolated option [Ref. 33]. More importantly in real dollars

(discount rate = inflation rate) the Upper Churchill option would result in a 4.1 billion dollars savings to the

Newfoundland consumer over the 50 year project life. If the Upper Churchill generation was regulated by the PUB

post 2041 these savings would be ~7.2 billion dollars (in 2010 dollars). The use of Upper Churchill power at

market rates clearly represents a lower cost alternative to Muskrat Falls. Any growth between the DG2 and DG3

estimates will only widen this gap.

During the PUB hearings in February a consumer asked (via the consumer advocate) if Nalcor has had negotiations

with Hydro-Quebec concerning purchasing power from their grid. Mr. Gilbert Bennett responded that “As far as

Hydro-Quebec is concerned, no, we have not undertaken detailed negotiations with Hydro-Quebec” [Ref. 26].

Considering the “Power Policy” as defined by the Government of Newfoundland within Section 3b of the Electrical

Power Control Act of 1994 [Ref. 27]:

(b) All sources and facilities for the production, transmission and distribution of power in the province should be managed and operated in a manner

(i) that would result in the most efficient production, transmission and distribution of power,



(ii) that would result in consumers in the province having equitable access to an adequate supply of power,

(iii) that would result in power being delivered to consumers in the province at the lowest possible cost consistent with reliable service,

The EPCA mandates both the Government and Nalcor to fully explore all avenues to provide the lowest cost power

to the people of the province. This mandate should be extended to review the potential for Upper Churchill to be

used in lieu of Muskrat Falls. The numbers presented in this essay may not be exact, but they do demonstrate the

clear case to further investigate this option. Although power purchases from Hydro-Quebec may not be politically

palatable to the people of the province we must be mature enough to realize that for the next 20 years this could

be the best possible solution to meet our growing electrical needs. Unpopular as it may be, the unexplored Upper

Churchill alternative may be in the best long term interest of the province!

For the remainder of this paper, there will be presentation and discussion of 3 potential mechanisms for importing

power either from the Upper Churchill facility, or other power from the North American Grid. These will include:

1. Request to increase the 300 MW recapture within the 2016 renewal of the 1969 Power Contract.

2. Redirection of power to Newfoundland and Labrador per section 8 of the Electrical Power Control Act

- 1994.

3. Power purchases under the FERC regulation 888 open access provisions. Power could theoretically

be purchased from Hydro-Quebec or some other North American utility and sold to Newfoundland

and Labrador Hydro.

These options have been reviewed in the past. However in the current context of Muskrat Falls, and the upcoming

2016 renewal, there is worth in re-exploring some of these old ideas



Figure 3: Summary of Annual Revenue Requirements MF versus UC Power Purchase

Table 2: Summary of Total Annual Revenue during 50 year Term (Discounted to 2010 Dollars)

Discount Rate = 2.5% Discount Rate = 8%

Total Delta Total Delta

Muskrat Falls Base Case $17,010,682 $- $4,112,669 $-

Upper Churchill – Market $12,874,318 $4,136,364 $3,150,486 $962,182

Upper Churchill – Regulated $9,774,545 $7,236,137 $2,838,054 $1,274,615



Part IV: Increased Recapture Allowance – The Sequel

Within the original 1969 Power Contract there was the provision for 300 MW of recall power for the purposes of

meeting provincial consumption within Newfoundland and Labrador. This energy (Some 2300 GWhr) could be

recaptured during the term of the contract for use within Labrador or with the construction of a subsea link in

Newfoundland. Although this represented less than 10% of the total generation of the Upper Churchill plant, it did

practically equal the entire generation of the province in 1966 when the Letter of Intent was signed. As it is

relevant for some of the subsequent discussions, the 300 MW recapture amount was entrenched in the 1966

Letter of Intent between Brinco and Hydro-Quebec. This was the firm amount of power which was requested by

the Province prior to the LOI being signed.

Newfoundland’s future energy needs could potentially be met by adjustment of the recapture amount with

transmission via the Labrador Island Link to Soldiers Pond. This sounds very simple, and it was attempted through

legal means in 1976. John Crosbie, as Minister of Energy within the Frank Moore’s government, sent a letter to

CFLCo requesting a total of 800 MW of power from the Upper Churchill to meet the growing requirements on the

island. This was premised upon the 1961 lease agreement between the Government of Newfoundland and Brinco,

which granted water rights to Brinco but guaranteed access for provincial use. The request from Crosbie is

provided below [Ref 7]:

Although the government was the majority shareholder within CFLCo, they none the less responded to the request

stating that it was not possible [Ref. 7]:



This exchange of correspondence resulted in a series of court cases in both Quebec and Newfoundland which

ended in two Supreme Court of Canada trials in 1982 and 1988 respectively. The legal proceedings [Ref. 7 – 10]

were largely focused upon the application and interpretation of Clause 2e of the original 1961 lease agreement

[Ref. 11].

Provided that upon request of the Government consumers of electricity in the province shall be given

priority where it is feasible and economic to do to.

The separate court proceedings resulted in the same conclusion, the legality and interpretation of Clause 2e was

largely irrelevant to the case. The Courts ruled against the Government of Newfoundland’s position, as it was

deemed that the 800 MW was in excess of the available power not committed to Hydro-Quebec. Any agreement

by CFLCo, would effectively put it in breach of the 1969 Power Contract. This is summarized most effectively by

the 1985 Newfoundland Court of Appeal [Ref.8]:

The efforts of John Crosbie and the Provincial government in 1976 had failed. To the knowledge of the Author the

revision to the recapture provision of the 1969 Power Contract has not been challenged since then. It is

considered prudent that this option be revisited in the context of the Muskrat Falls development and the

upcoming 2016 automatic renewal of the 1969 Power Contract. The former clearly documents that the additional

recapture would be economic and feasible, where the latter will counter the legal arguments successfully used by

Hydro-Quebec some 30 years ago.

The following is a recap of the primary arguments from each party within the 1983 Goodridge decision [Ref. 7].

For each argument the Author has provided commentary regarding its current applicability.

For the Defense of CFLCo, Hydro-Quebec and Trust

1) It was not feasible and economic and economic to provide 800 MW of power as the request would

effectively put it in Breach of Contract, and in default under the security instruments. The default of the

bonds and financing would ensure that the supply of 800 MW would be unfeasible nor economic, the

fundamental requirement under Clause 2e of the Lease Agreement.

The issue of the securities and Trust Deed was a major theme within the court decision. In simple terms

these were the financing agreements which were entered into by CFLCo to fund the construction of the

Churchill Falls facility. The release of 800 MW of power would have placed CFLCo in potential default of

these financing agreements, which would have reportedly resulted in significant penalties.

In 1980 there was still 30 years of debt repayment, and any default of these terms would have had severe

economic consequence to CFLCo Within their 2010 annual report Nalcor stated that all loans, bonds and

other debts associated with the construction of the Churchill Falls project were retired [Ref 20].



Nalcor 2010 Annual and Financial Report [Ref. 20]

It could be potentially argued that any such release of 800 MW of power (<15% of total generation) would

now not result in any penalties under the financing agreements. As will be discussed in more detail within

the next section of this essay, the 1969 Power Contract had clear provision for such deficiency in energy

delivery. Therefore it was duly recognized by both signatories to the contract that there may be

interruptions with the supply of energy of this order of magnitude.

2) CLFCo argued that “Government participated in negotiations leading to the execution of the Power

Contract, which contains section 6.6 a provision for recapture of 300 MW. CFLCo alleged that the

government had made known what its future requirements were and according to CFLCo it expressly or

implicitly agreed that it would not request power in excess of this amount. Furthermore it was argued

that the Government exhausted its rights under Clause 2e of the 1961 Lease Agreement.

This was one of the major arguments presented by the Defendants within the 1983 Goodridge decision. It

is one which I agree with in principal. But it must be acknowledged that the original court case did not

appear to link the “Renewal Clause” to the Letter of Intent. For those who are not aware, the original

Power Contract contained a clause that automatically triggered a renewal 25 years following the initial 44

year term. This renewal clause was not expressly defined within the original Letter of Intent in 1966, and

it was in fact one of the last items to be negotiated within the contract.

All Newfoundlanders interested in the Upper Churchill project should review the Jim Feehan and Melvin

Baker paper [Ref. 12] dedicated to the renewal clause. It represents a major piece of work and academic

contribution to the modern politic debate. It does make a passionate and sound argument that the ill-

considered renewal clause is the result of economic duress that Brinco found itself in by the aggressive

negotiating tactics of Hydro-Quebec. In reading this paper, and other documentation, it is apparent that

the 300 MW recapture (as requested by the government) was entrenched within the Letter of Intent

signed on October 13, 1966. However this allocation of 300 MW should be considered in conjunction

with the language used to describe the renewal clause within the Letter of Intent [Ref. 12]:



It is certain that in the 1966 LOI although the recapture power was limited to 300 MW in the initial term

of the contract, the quantity and price was to be negotiated in good faith prior to any renewal. Following

the signing of the LOI the Government requested that this 300 MW be increased to 500 MW on April 14,

1967. CFLCo replied that it would prove to be a serious obstacle in the final negotiations. However, this

could be considered that the Government did provide notification to Brinco that it did intend to increase

the recapture in the future, the only remaining option to do that would be within the renewal

negotiations. The language within the renewal term in 1967 would permit this increase following the

original 44 year term of the contract in 2016.

Paragraph 515 on page 65 of the Goodridge Proceedings [Ref. 7] indicate that “there are a great number

of examples in the evidence illustrating that the province knew and accepted the proposition that’s its

right under Clause 2e was being limited to 300 MW. It wanted more but ultimately yielded to that figure.

It recognized that the energy could be generated by this amount of power with the balance coming from

the Lower Churchill”.

However it should be investigated whether the body of evidence referenced by Goodridge was prior to

the renewal clause in its final form. As late as February 1968 the renewal clause was consistent with the

LOI.

Furthermore as reported by Feehan / Baker the March 7, 1968 draft contract still had the option for

CFLCo to have a lower amount of power sold to Hydro-Quebec, however the fixed price structure was

agreed. Between this date and the end of April 1968 the negotiations were effectively completed. Part

of these final negotiations was the revision of the renewal clause to its present form.

It is a matter of interest as to the level of disclosure Brinco made to the Newfoundland Government

concerning the change in the renewal provisions. It has been reported by Feehan & Baker that the

Government of Newfoundland were not notified of the changes to the renewal clause until July 1968, via



a phone call to Premier Smallwood. The conversation about renewal was limited to the fixed costs, and

not necessarily regarding the amount of power obligated within the renewal period.

If CFLCo did not disclose the removal of “agreed quantity and price” from the renewal term to the

Newfoundland Government does this affect one of the primary arguments against the Attorney General

of Newfoundland in the 1983 court case? Is this alone worth revisiting the 1976 efforts by John Crosbie

to recall more energy for provincial consumption?

3) Hydro-Quebec Argued that the Government is not entitled to make any request which would interfere

with the delivery of electrical power by CFLCo to It.

This was one of the primary arguments of Hydro-Quebec in the Newfoundland and Quebec court

proceedings. However, after the completion of the legal challenges the Province of Newfoundland and

Labrador implemented the Electrical Power Control Act in 1994. This legislation was reportedly drafted by

Clyde Wells in the 1980’s and has very direct language that enables the government to redirect power

within the province to meet shortfalls within the electrical system. Consider Section 8.0 of the EPCA-

1994:

There is an argument that this “change in law” would constitute a Force Majeure claim if it was initiated

by the Public Utilities Board. The Force Majeure definition within the 1969 Power Contract is as follows:



Likewise the Force Majeure definition within the GWAC is as follows:

It is unclear if an EPCA triggered order would constitute a true Force Majeure per either of these

definitions. The EPCA could not be described as “fortuitous” nor could the adoption of EPCA to avoid the

Muskrat Falls investment be considered something which was not avoidable with proper planning and

foresight. I would value legal opinion regarding the applicability of EPCA as a Force Majeure claim,

however it is the opinion of the author that this would be a weak argument at best.

This does not diminish that the EPCA is a law of the land which can’t be ignored by CFLCo and/or its

Directors. CFLCo has an obligation to make best efforts to accommodate any request by the PUB to

redirect power. Therefore in the context of the 1983 court case regarding recapture allowance, there is a

clear law which states the Government of Newfoundland, through the PUB, has the right to request and

obtain power. However, CFLCo and Hydro-Quebec would have to receive fair and reasonable

compensation for this power as per the language contained within the EPCA.

In the absence of a Force Majeure claim, CFLCo would be in breach of contract if they complied with the

request by the PUB to redirect power. Hydro-Quebec would be entitled to the penalties entrenched

within Article VIII of the 1969 Power Contract, or alternatively Article 11 of the GWAC. The penalties and

damages outlined in the respective contracts could potentially be the limit of the financial liability to the

Newfoundland consumer if Article 8 of the EPCA was implemented. As will be described in the next

section, the total damages and penalties could ultimately be a lower cost than Muskrat Falls.

There are several counters to this argument. The first is that the Churchill complex is exempt from the

EPCA [Ref. 28]. The exemption was issued in 2000 to Newfoundland Hydro, which at the time was the

parent company of CFLCo AS CFLCo is now a sister company of Newfoundland and Labrador Hydro, both

under the parent company of Nalcor, is it unclear if this exemption is applicable to the Upper Churchill

plant? If it is exempted, then the 2000 order would have to be repealed by the House of Assembly.

The second counter to this argument is that under Quebec contracts law specific performance may be

invoked in the event of breach [Ref. 29]. Under English law, which is the basis of the Newfoundland legal

system, monetary damages or penalties are the common remedy for breach of contract. Under Quebec

contract law the courts usually enforce the party in breach to actually fulfill their contractual obligation.

As the 1969 Power Contract is under Quebec law, specific performance may be evoked. In this scenario

CFLCo would receive a court order to resume the delivery of energy to Hydro-Quebec. However, there is

an exception under Quebec law where monetary damages may be the remedy for breach when the rule

of law prevents specific performance of the obligation. It could be argued that although the Electrical

Power Control Act is not a law of Quebec, it is the ruling law in the jurisdiction where the contractual

obligation is completed, and as such specific performance would not be the appropriate remedy.



4) Hydro-Quebec had put Government in Strict Proof that there was a requirement for power and that it

was economical and feasible to do so.

With the retirement of the debt obligations of CFLCo, and the clear deficiency penalties and damages

entrenched within both the Power Contract and the Guaranteed Winter Availability Contract, there is a

potential case in 2012 to establish the economic feasibility of Upper Churchill recall and transmission to

the island. I believe this case would stronger if the LIL was committed to and therefore not introduced to

any legal argument.

5) Hydro-Quebec argued in Quebec Proceedings [Ref. 10] that is needed all electrical energy generated by

the harnessing of Churchill Falls to ensure the economic growth in the province of Quebec and to meet

the present and future needs of consumers of energy in that province.

This argument from the 1982 Supreme Court of Canada proceedings is no longer valid. It is clearly

understood that Hydro-Quebec are a net exporter of energy. A part of these exports is the low cost

power from the Upper Churchill.

6) It was argued by Hydro-Quebec that they provided numerous financial considerations and guarantees

which enabled the Upper Churchill project to proceed. None of these considerations would have been

granted if it was not for CFLCo’s firm and unambiguous undertaking to deliver to it all the power and

energy produced by the Churchill Falls Plant.

There were numerous arguments to this effect within the proceedings from the 1982 Supreme Court and

the 1983 Goodridge decisions. Within the term of the original Power Contract I believe it would be

difficult to successfully argue this point. It is clear to any historian that the project would not have

proceeded without the completion guarantee provided by Hydro-Quebec.

In the context of the renewal clause, and following similar argument presented above for the recapture

amount, this argument is not as strong for the period following 2016. Hydro-Quebec had proceeded and

committed to completing the project under the 1966 Letter of Intent with the terms and conditions of the

renewal clause yet to be negotiated. The additional increase in recapture from 300 MW to 800 MW could

have been reasonably foreseen in 1966 as an expected level of growth in provincial demand. As such it

could not be viewed as a fundamental consideration of the Power Contract as entrenched within the LOI.

As was recommended within the author’s February 29th

submission to the PUB there is certainly a case to review

the original legal effort to recall additional power from the Upper Churchill. From review there are several of the

primary arguments which are either no longer valid, or in the context of the 2016 renewal have considerably

weakened. It is an issue which legal opinion should be sought, and presented by Nalcor and the government prior

to any DG3 commitment to construct the MFGF.

All Newfoundlanders interested in Churchill Falls are recommended to read the excellent paper by Jim Feehan and

Melvin Baker on the subject of the renewal clause. They have done a yeoman’s service to the Province.



Part V: Redirection Using the Deficiency Provisions

Contracts are generally written to provide protection to each party. Within the 1969 Power Contract [Ref. 15]

Hydro-Quebec required protection for its own cost in the event that CFLCo could not deliver the energy agreed.

This financial protection would allow payments to be made on the transmission facilities, and to find alternative

energy elsewhere to meet long term power sales agreements. The original Power Contract dealt with this issue

with the introduction of the term Deficiencies, and Article VIII – Firm Capacity Penalty. Within the Power Contract

the term “Deficiency” is defined within Schedule III – Article I as:

In respect of any request by Hydro-Quebec made pursuant to Section 5.3 hereof for the supply at any time

of capacity, that number of megawatts out of the total megawatts so requested which (exclusive of

capacity in excess of firm capacity) CFLCo fails to make available at the Delivery Point at such time.

Article VIII – Firm Capacity Penalty describes in detail the penalty which Hydro-Quebec are able to deduct from

their payments to CFLCo in the event of such deficiency. The details are as follows:

The penalties for deficiency beyond 24 hours is $40 per MW Day, an equivalent of $1.67/MWhr. This is an

incredibly low cost, but as per the original selling price, it suffers from the lack of escalation within the contract

term.

The adoption of the “Deficiency” provisions to the potential redirection of energy to the province of Newfoundland

is of primary interest to the Author. It is not clear why this was not pursued within the original court challenges by

the province. The contract clearly considered the potential for not meeting the firm capacity, and was the basis

which Hydro-Quebec entered into the contract. However in the late 70’s and early 80’s this may have weakened

the position of the government. Premised upon Clause 2e of the original lease agreement, the government’s

position was that they should be entitled to energy at the same cost of Hydro-Quebec. To keep CFLCo whole the

province would have to pay the cost equaling both the sales price to Hydro-Quebec, and any additional penalty

fee. This would have countered the “feasible and economic” argument. The Government of Newfoundland



argued that the order in council would also constitute a force majeure claim by CFLCo, where the penalties would

not be enforceable. Any additional damages which could have been sought by Hydro-Quebec would also not be

valid. It is likely the government did not pursue the deficiency mechanism as it would potentially open the door

for other, more significant damages which were obtainable at law.

However, in 2016 the total of the sales rate to Hydro-Quebec ($2/MWhr) plus the penalty fee ($1.67/MWhr)

would equal less than $4/MWhr. This is approximately 1/20th

of the Muskrat Falls generating costs alone!

The definition of Deficiency is broad, and could include the shortfalls resulting from CFLCo sales to other

customers. The 1998 Shareholder’s Agreement between Hydro-Quebec and Newfoundland and Labrador Hydro

[Ref. 13] has clear rules relating to the modification of existing contracts and the entering in of new contracts by

CFLCo Any such action would require approval of the majority of the directors and at least 1 director nominated

by both Hydro-Quebec and Newfoundland and Labrador Hydro. The reader may conclude that this will limit the

ability for CFLCo to sell additional power to NLH at a profit and simply pay the subsequent penalties to Hydro-

Quebec. However, Clause 3.7 of the Shareholders Agreement defines the duties of the directors. Each director

shall (i) act honestly and in good faith in the best interest of CFLCo, and (ii) exercise the care, diligence and skill

that a reasonable prudent person would exercise in comparable circumstance.

Although any such sale of excess power to NLH may constitute a breach of the power contract there is potentially a

clear business case for doing so. It is an arrangement that the Directors of CLFCo acting in the best interest of

CFLCo, would be obliged to support. For this potential to have any legal merit the price that NLH would pay for the

power would include the following:

1. Meet or exceed the price that energy is sold to Hydro-Quebec by CFLCo In 2016 this will be $2/MWhr.

2. The Penalties as defined within the Power Contract defined within Article 8 as $1.67/MWhr.

3. Any additional damages which may be payable to Hydro-Quebec under relief sought under general

damages from breach of contract.

The last point is the most interesting and open to debate. Although the 1969 Power Contract is silent on any sort

of general liability for breach of contract there may be a requirement to compensate Hydro-Quebec for any loss of

profit associated with the power sales from the Upper Churchill. This loss of profit would not be the loss of profit

actually realized today, but in fact would be the loss of profit that was contemplated when the contract was

signed. Other potential damages would be any consequential impacts for not meeting long term sales

agreements, or financing penalties. The latter was one of the primary arguments against the “feasible and

economic” legal challenge in the 1983 court case. However, the long term debt of CF is retired, thus extinguishing

this as a potential damage.

Philip Smith in his 1975 book “Brinco – The Story of Churchill Falls” provides an excellent narrative on the Churchill

Falls negotiations between the respective parties. It was clear that during the 1960’s people did not anticipate the

dramatic increases in energy costs. Smith states (Page 270) that Hydro-Quebec communicated to Brinco that they

expected 5.5 mil to be a reasonable selling price to the United States. This price was considered to be the upper

bound considering the growth in nuclear energy in this period. This was used to pressure Brinco to lower their

sales rates for energy to Hydro-Quebec, and in fact agree to the 25 year renewal at a fixed rate.

The fact that Hydro-Quebec have experienced tremendous profit since then is not relevant. At the time Hydro-

Quebec only predicted modest profits in the 2-3 mill range, and that this was used in the negotiations to drive a

very low sales price. This is well documented. Even if a normal annual escalation of 2.5% was applied, the profits

realized in 2016 would be $11/MWhr. Therefore, if CFLCo were to resell Upper Churchill power the final rate to

ensure a clear business case would have to be higher than $16/MWhr ($2 + $1.67 + $11/MWhr). If NLH purchased



power from CFLCo at $20/MWhr escalated at 2.5% per year until 2041 then CFLCo would effectively double their

profits. This is a business case which could not be ignored by the board of CFLCo. The $20/MWhr is also one

quarter of the cost of Muskrat Falls. It should therefore not be discounted by the people of the province.

It is important to note that the small amounts of electricity being diverted would also not likely constitute a

material breach of contract as the original Power Contract clearly considered, and addressed deficiencies of this

amount.

Guaranteed Winter Availability Contract – 1998 [Ref. 14]

In 1998 the Guaranteed Winter Availability Contract (GWAC) was signed, which provided additional revenue to

CFLCo for energy sold to Hydro-Quebec in the winter months, which was beyond the firm capacity within the 1969

Power Contract. This contract had a higher sales rate for this additional energy. It also has defined credits for

deficiencies, which has the same definition as in the Power Contract.

The GWAC differed from the Power Contract in that there is a Limitation of Liability Clause which limits the

damages for breach of contract by CFLCo to the deficiency credits calculated within the contract. This is provided

for the information of the reader below [Ref. 14].

Clause 5.3 of the GWAC also states that “for the avoidance of doubt, except for cases of Force Majeure, whenever

a Power Contract deficiency occurs, a deficiency shall be deemed to have occurred under this contract in respect

of the additional availability” .

Therefore, when considering the cost of Upper Churchill power redirected to Newfoundland Hydro there will be a

different penalty which would have to be compensated to Hydro-Quebec. This is summarized within Table 3.



Table 3: NLH Purchase Price Using Deficiency Clauses

Period Contract Description Rate $/MWhr

2017

November 1 – March 31

GWAC

Deficiency Penalty Per Schedule B

24.40

CFLCo original Sales Fee (To keep them Whole)

24.40

Additional Damages1 0.00

Additional Profit to CFLCo2 10.00

Total 58.80

April 1 – October 31 1969 Power

Contract

Deficiency Penalty Per Article VIII

1.67

CFLco Original Sales Fee (To Keep them Whole)

2.00

Additional Damages3 11.00

Additional Profit to CFLCo2 5.00

Total 19.67 1) Assumed that in the absence of long term power agreements, and that Hydro-Quebec are a net

exporter of energy any other damages or remedies would be limited in the event of breach of contract by CFLCo

2) For CFLCo to redirect power to NLH, and to effectively breach the 1969 Power Contract, or the GWAC there needs to be a clear economic reason to do so. The additional premium offered by NLH would provide this economic rational to breach the respective contracts.

3) Within the 1969 contract Hydro-Quebec would likely seek, and would receive remedies resulting from the breach by CFLCo It is assumed that in the absence of any long term contracts, or financing penalties any damages would be capped at the cost of the investment by QH (from the penalty fee) and loss of profit. Loss of Profit would be capped at what was reasonable at the time of contract signing. The 11 $/MWhr is the anticipated profit of 2.5 mills per kwhr escalated at 3.0% per annum from 1966-2017.

Total Costs of “Deficiency” Electricity

The predicted shortfall of energy on the island of Newfoundland is primarily a winter phenomenon. The Muskrat

Falls facility, as per the Upper Churchill will be managed to produce the highest electrical output in the winter

months. Table 4 provides an indicative production summary by month of the year assuming that the Muskrat Falls

plant produces 4900 GWhr of energy annually.

Assuming that 54% of the energy would be redirected in the GWAC period a blended rate of $40.35/MWhr can be

calculated (54% x 58.80 + 46% x 19.67). Assuming an escalation rate of 2.5% the analysis presented within Figure 2

can be reproduced assuming the proposed blended rate for Upper Churchill energy. Although this is an academic

discussion, if Upper Churchill power was available per this rate structure it would be 4.9 and 1.2 Billion dollars

cheaper than Muskrat Falls for a discount rate of 2.5% and 8% respectively. This is summarized in Table 5.



Table 4: Indicative Production (GWhr) From Muskrat Falls By Month

Table 5: Summary of Total Required Revenue Over 50 Yr Project Life

Discount Rate = 2.5% Discount Rate = 8%

Total Delta Total Delta

Muskrat Falls Base Case $17,010,682 $- $4,112,669 $-

Upper Churchill – Market $12,866,795 $4,143,887 $3,147,415 $965,254

Upper Churchill - Regulated $9,774,545 $7,236,137 $2,838,054 $1,274,615

Upper Churchill – Deficiency Provisions

$12,047,668 $4,963,014 $2,869,414 $1,243,255

The Author has presented an argument to utilize of the deficiency provisions of the 1969 Power Contract to

redirect energy from the Upper Churchill for domestic provincial use, at rates potentially less than the North

American norm. From the research completed there is very little discussion about this option available within the

public domain. During the previous court challenges it is likely that arguments about penalties would have evoked

breach of contract and opened the door to larger damages available to Hydro-Quebec at law. Like so many of the

other arguments concerning the original contract, the 2016 renewal means that these clauses should be reviewed.

In the absence of any long term power delivery obligations, requirements to replace the energy within the grid, or

penalties under the financing agreements it is not clear if the total damages payable to Hydro-Quebec would be

any more than loss of profit. The loss of profit would not be the large windfall which Hydro-Quebec has

experienced. Rather the damages of loss of profit would be that which was reasonably contemplated when the

Agreements were signed.

As briefly described in the previous section under Quebec law Hydro-Quebec could seek injunctive relief to force

CFLCo to continue to meet it contractual obligations [Ref. 29] under specific performance. This right is written into

Clause 11.1 of the GWAC. However, if Section 8 of the EPCA was evoked by the Public Utilities Board, and they

offered a price consistent with that provided in Table 3, I believe that there would be an argument to be made in

Days

Total Possible

Energy Based

on 824 MW

Rating Factor Total

31 613 0.9 551.8

28 554 0.9 498.4

31 613 0.9 551.8

30 593 0.8 474.6

31 613 0.5 306.5

30 593 0.4 237.3

31 613 0.38 233.0

31 613 0.4 245.2

30 593 0.6 356.0

31 613 0.7 429.1

30 593 0.9 534.0

31 613 0.9 551.8

4969.3

GWAC Period 54.1% 2687.6

1969 Period 45.9% 2281.8

Total



the court that financial damages is the most applicable form of remedy for breach. In this discussion the Electrical

Power Control Act provides the stick, and the compensation provided in Table 3 becomes the carrot.

Although Upper Churchill power was not one of the options that the government committed to study following the

issuance of the PUB report, Minister Kennedy has committed to provide information regarding several of the legal

options. Consider the July 31, 2012 call to back talk with Paddy Daly [Ref. 30]:

There is no question that we could recall Power under 92A. But we have been advised by a

leading contract expert in Quebec that the recall of power for commercial purposes would not

amount to a Force Majeure which is the only way to set aside the contract. In essence what we

would is to be subject to billions of dollars of damages for breach of the Power Contract which

is governed by the law of Quebec. We will also be providing information on that.

Clause 92A of the Canadian Constitution may potentially provide a means to recall power from the Upper

Churchill. However it is not the only legal means at our disposal. The Electrical Power Control Act is an enabler for

the recall of power from the Upper Churchill. In addition to providing a legal opinion on 92A the Government

should also provide legal opinion on the Applicability of EPCA-1994, utilizing the Penalty clauses entrenched in the

1969 Power Contract. The question is simple “what are the damages which we would be potentially exposed to,

and do those damages represent a lower cost option than compared to the Muskrat Falls development”.

Part VI: Power Purchase From Quebec and/or CFLCo – FERC Guidelines

Part III of this essay provided an economic model to illustrate that if Upper Churchill power was available at market

rates then it would prove to be a lower cost option when compared to Muskrat Falls. This is based on the long

term projections from the US Energy Information Association (EIA). Considering that a phased approach to the

Muskrat Falls project with the construction of the Labrador Island Link within the current schedule, would allow

immediate access to the Upper Churchill power this is an option which could be considered. A decision can be

made at a latter date to construct the Muskrat Falls generation facility when the island demand warrants it

(presently it do not) and/or the US market is such that it will make economic sense to proceed with the generation

element of the project. .

Part IV and Part V provides academic discussions about potential mechanisms to get access to Upper Churchill

power through legal means. This is either re-visiting the 1976 request of the Government of Newfoundland to

recall 800 MW, or by CFLCo effectively breaching the contract with Hydro-Quebec to sell power to Newfoundland

at a price potentially less than the North American benchmark. Both these arguments are academic, but it is a

debate which should be happening prior to sanctioning the Muskrat Falls project.

However, what should be certainly considered is the access rights that Newfoundland and Labrador would have to

the Churchill Falls power, or in fact energy from other North American utilities, under the US Federal Energy

Regulatory Commission. First some background must be provided. The Federal Energy Regulatory Commission

(FERC) is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates,

hydroelectric licensing, natural gas pricing, and oil pipeline rates. FERC also reviews and authorizes liquefied

natural gas (LNG) terminals, interstate natural gas pipelines and non-federal hydropower projects. In recent

years, the FERC has been promoting the voluntary formation of Regional Transmission Organizations (RTOs) and



Independent System Operators (ISOs) to eliminate the potential for undue discrimination in access to the electric

grid [Ref. 16].

In the late 1990’s FERC passed the Regulation 888 which allowed for the deregulation of the electricity markets.

There was a clear drive to decouple the generation and transmission of electricity to ensure the most cost effective

solution to the US consumers. Any foreign utility would have to offer reciprocity to enable a license to sell energy

in the United States. To protect it’s exports into the United States, Hydro-Quebec had to adopt the regulations of

FERC, effectively allowing outside utilities to wheel power over its transmission facilities. Brian Tobin in a 1997

speech to the New England governors effectively summarized the initiative [ref. 17].

This new market structure is due in no small measure to the leadership of the U.S. Federal Energy

Regulatory Commission (FERC). One year ago, FERC Order 888 established a fair and sustainable means

of securing open and non-discriminatory trade in electricity at the wholesale level. The FERC has provided

the new deregulated market environment, thereby allowing the benefits of technological change and

economic advantage to get to the end consumer. Utilities across North America are responding to this

challenge. I was pleased to see, just a few weeks ago, that Hydro-Quebec was successful in obtaining

conditional FERC approval for a power marketing licence. I am confident Hydro-Quebec will meet these

conditions. Newfoundland and Labrador Hydro intervened in that FERC hearing. The purpose of the

intervention was not to protest or prevent Hydro-Quebec from achieving a power marketing licence.

Indeed, our success in this new market is linked to Quebec meeting all the FERC conditions of open and

transparent transmission access; and, that was the purpose of the intervention.

Nalcor have successfully wheeled the excess Upper Churchill recall power using these provisions. They have also

unsuccessfully lobbied to get access to Hydro-Quebec Transenergie lines for the purposes of wheeling power

generated from the Lower Churchill development. However, what I have not read in any debate is the applicability

of FERC is ensuring the Newfoundland Consumer gets equal access to the Upper Churchill Power. Considering that

FERC mandate is as follows:

The Federal Energy Regulatory Commission (FERC) in 1997 upheld its landmark final rule on open access

transmission service and stranded costs, Order No. 888. 1 The FERC's Open Access Rule requires each

"public utility" that owns, operates or controls interstate electric transmission facilities to (i) provide

transmission service to its customers on a basis comparable to that which it provides transmission service

for itself on behalf of its own customers, (ii) offer generation, transmission and ancillary services on an

unbundled, separately-priced basis, and (iii) separate its marketing and transmission functions. The pro-

forma open access transmission tariff, which sets forth the standard terms and conditions under which

public utilities must offer open access transmission service, implements the principle of comparability of

service. As indicated by the FERC, "unbundled electric transmission service will be the centerpiece of a

freely traded commodity market in electricity in which wholesale customers can shop for competitively-

priced power." 2

The requirement for FERC to separate the generation and transmission functions of a public utility is one of the

reasons why Hydro-Quebec restructured to have the HQ Transenergie transmission division. The 1969 Power

Contract is with Hydro-Quebec, but in the application of FERC there must be an internal transmission fee applied

to the power prior to the resell into the United States. Furthermore, I would consider that it is the fundamental



principal of open and de-regulated energy markets that Newfoundland would get equal access to the Upper

Churchill power at the same rate which Hydro-Quebec sells it power outside of the Heritage Pool.

There is a case that FERC regulations, and the requirement for reciprocity to all parties, would ensure that

Newfoundland consumers would get access to Upper Churchill energy at market rates, subtracting the normal

transmission fee. Presently prices in New England are in the 3-4 cents per kw-hr range. Subtract the wheeling fee

which HQ has previously charged we should be getting energy in the 2-3 cents a kwhr from the Upper Churchill

facility. This is 10 times what Hydro-Quebec are paying for the same energy from CFLCo But most importantly it is

about 1/3rd

of the cost of energy produced from Muskrat Falls.

I am not an expert in this subject area, but the above discussion is certainly consistent with the principals of FERC.

The Government of Newfoundland and Labrador as well as Nalcor have pursued the application of FERC with

respect to the development of the Lower Churchill. They should also pursue equal access to the generation of the

Upper Churchill power with the same conviction. Even if for “grandfathering reasons” Upper Churchill energy is

not theoretically available I do not see any reason why low cost natural gas electricity generated in New England

could not be transmitted over the Hydro-Quebec lines to meet Newfoundland energy requirements during the

winter months. On a long term basis this may not be the best option. But considering that we only need to bridge

to 2041 it is certainly an alternative which deserves more than a cursory review. Unlike Nalcor’s DG1 screening the

option for electrical imports need to be made in the current shale gas environment.

It is also interesting to note that although FERC permitted the grandfathering of existing power purchase

agreements or transmission contracts there was a clear effort to move away from this. FERC has published a paper

relating to grandfathered rights [Ref. 18] which clearly indicates

The 1969 Power Contract renewal is automatic in 2016. But is there a case to renegotiate the automatic renewal

pursuant to change in law, or the FERC deregulated market? Does CFLCo have a case to renegotiate the 1969

Power Contract under the requirements for FERC to allow transmission over existing transmission facilities per the

OATT guidelines? Does the 2016 renewal provide the opportunity to open this debate?

The FERC regulations are embedded in fairness, and equity amongst parties. To be granted a license to sell power

in the US Hydro-Quebec have to operate in a manner consistent with these principals. Right now the current

situation does not appear fair to the people of Newfoundland and Labrador.



Part VII: Peak Power Requirements – The Upper Churchill Trump Card

Do we need the power? This is one of the 2 questions used by government to frame the Muskrat Falls debate.

Although one can argue how much power is actually required, it can not be denied that we will need access to new

energy into the future. Due to our diminishing industrial load, cold climate, larger homes and heavy reliance on

base board heating our energy requirements are primarily within the winter months. Although Muskrat Falls has a

predicted average annual production of 4900 GWhr, it is a run of the river facility and is therefore not well suited

for peak loads. This was identified within Volume II of the MHI submission to the PUB [Ref. 33].

As identified by the Author [Ref. 1] even if the Muskrat Falls plant can operate at 85% load factor in winter then

there will still be potential shortfalls in capacity in the winter months when the historical generation profile of the

island’s heritage hydro pool is considered. This is illustrated within Figure 4. When considering the 167 MW of

peak power delivery to Emera there could be shortfalls experienced as early as 2035.

To meet the peak winter requirements the Infeed alternative presented to the PUB requires the addition of new

small hydro-electric on the island, as well as some 500 MW of new thermal generation. In 2067 the generation

capacity mix for the infeed option will be based on 65% hydroelectric and 35% thermal. Energy will be based on a

dispatch pattern that minimizes fuel use [Ref. 33]. In addition to thermal generation equivalent to Holyrood, the

islands peak demands will be also met through a complicated water management agreement where Muskrat Falls

power is provided to Hydro-Quebec in the summer to save water for the winter peak period [Ref. 31].

Although there is little public discussion of the additional peak generation requirements there is hundreds of

millions of dollars of additional capital investment required following the construction of Muskrat Falls to meet the

island demand in winter. To allow the reader to fully understand the financial commitment which Nalcor are

about to embark on Figure 5 provides a summary of the total annual revenue requirement for the full Infeed

expansion option [Ref. 32], as well as compared the revenue for Muskrat Falls alone [Ref. 6].



Figure 4: Typical Monthly Generation Profile [Ref. 1]

Figure 5: Total Annual Revenue Requirement for Infeed Option [Ref. 32]



An advantage offered by the potential power purchase from the Upper Churchill is that this additional peak

generation requirements on the island can be potentially reduced. There is plenty of capacity from the Upper

Churchill plant to meet the islands demands in winter. When considering the cost of the full expansion scenario,

including the MFGF, the small hydro and the additional thermal generation there is an additional savings beyond

what was presented within Table 2 when considering power purchases from the Upper Churchill.

The government promotes the Muskrat Falls development as a means to provide wealth to future generations of

Newfoundlanders. Figure 5 clearly demonstrates that the development will represent a major financial liability for

the province for the entire 50 year term. The potential financial benefits from early energy exports is clearly offset

by the required thermal generation which will be likely required in winter to fulfill the Emera commitment. By the

exclusion of power exports from the PUB terms of reference there has not been the opportunity provided to the

public to truly understand if the Emera partnership will lower or increase electrical rates to the island consumers.

This is yet another example of how the current Muskrat Falls development plan does not follow the fundamental

policies identified within the Electrical Power Control Act.

A benefit of the Upper Churchill alternative is that it represents a power supply which can only be considered

limitless. It can meet our peak winter requirements, and it will reduce the need to supplement the grid with

thermal generation. Most importantly as we are not signing a 50 year “take or pay agreement” it significantly

reduces the risk to the Newfoundland consumer if the provincial demand does not grow at the 0.8% annual rate as

forecasted by Nalcor [Ref. 32]. Although outside the scope of this discussion paper the Author has provided a

sensitivity on the variability of the demand forecast [Ref. 1].

Part VII: Conclusions

We are presently in a time of contrast. Fuelled by shale gas the electricity markets in North America have

softened, to where the selling price is now 1/3rd

of where it was prior to the financial crisis in 2008. Although the

economy in the US shows signs of a modest recovery, the shale gas is ensuring that the long term electricity price

projections remain stable. Meanwhile project costs in Newfoundland and Labrador are increasing. This is being

experienced in all major projects underway, and is driven by the robustness of the local economy. Nalcor has

acknowledged that the Muskrat Falls cost will increase from the DG2 numbers. It is rumored that the final price

tag will be around 8.5 billion, a 37% increase from the estimates of just 2 years ago [Ref. 19]. Unfortunately, is

even prior to any substantial physical work being completed.

We must look at this objectively. Muskrat Falls can not be validated by comparing it to oil generation, the latter

being one of the most expensive ways to generate electricity in the world. We must look at all options including

wind and natural gas. However, we also look at the solution using power generated from the Upper Churchill

transmitted by a subsea link to the island of Newfoundland. Forgetting existing contracts, or political realities all

would agree this is the most obvious solution. In this essay the author has suggested that over the 50 year project

life there will be “real” savings of up to 4 Billion dollars to the Newfoundland consumer if Upper Churchill power

was purchased at market rates. This type of savings can not be overlooked in an effort to correct the mistakes of

the past. It is the option which is in the best interest of the people of the province.

Within this essay the author has provided three scenarios to potentially gain access to Upper Churchill power at

market rates, or better. Each of these arguments are stronger when considering that the 1969 Contract is set for

renewal in 2016. Although the renewal is automatic it does potentially weaken some of the legal arguments

successfully used by Hydro-Quebec in the earlier court cases. The de-regulation of the North American electricity



markets should also ensure that Newfoundlanders gain access to energy at competitive rates. In the current

energy climate Muskrat Falls is not a competitive solution.

This essay was penned as the Government and Nalcor have not offered much tangible discussion regarding power

purchases from CFLCo or Hydro-Quebec. There was no mention of Churchill Falls in Nalcor’s screening assessment

included within the November 10th

, 2011 submission to the PUB. Although Minister Kennedy did commit to

examining natural gas and wind, there has been no such commitment to study or review the concepts presented

herein. As far as the public is concerned it remains an unexplored alternative.

The fundamental question in the entire debate is if the Newfoundland consumer are getting the lowest cost power

available to them? In not exploring Upper Churchill power, even as a purchase from Hydro-Quebec, there has

been fundamental departure from the power policy objectives of the EPCA-1994. It is a shame that the PUB does

not have the opportunity to confirm and validate the DG3 numbers for Muskrat Fall’s project. If the PUB has no

authority to confirm the largest provincial expenditure in our history it has been marginalized and perhaps no

longer relevant? However Section 7.3 of the EPCA gives the PUB a defense against such strong armed tactics of

the government. I provide it for the reader to interpret:

The people of the province are being railroaded into a project where not all the options have been explored to the

fullest. The financial commitment is enormous, and the decision can not be reneged. The decision to proceed

with the development will commit multiple generations of Newfoundlanders. Under the Electrical Power Control

Act there is an obligation for the government, Nalcor and the PUB to pursue all options to the fullest, this must

include the Upper Churchill alternative. I can only hope that someone takes the charge. I would like conclude this

discussion paper by quoting Clyde Wells when he introduced the Electrical Power Control Act in 1994 [Ref. 21].

Section 7 is entirely new and what it provides is that where any producer or retailer is concerned that it may not be able to generate enough power to meet the anticipated power needs of its customers, and its perspective customers, in the manner required by this act, that is the lowest possible cost power, it may request the Public Utilities Board to conduct an inquiry into that matter. The government could request the PU Board to do it, or the PU Board could do it of its own accord under subsection (3). Then they are required, under 8(1) to hold a public hearing. So the whole matter has to come before a full public hearing so that everybody who has an interest in the cost of power in the Province has a means of expressing a view on how new future power supplies should be developed. That's part of the overall planning. Instead of it being done now, quietly, in Hydro's offices, or in government offices, or in the Department of Mines and Energy, it will be done in a way that has, in the end, to be very public and transparent, and require planning before the Public Utilities Board. This is what 8(1) requires.



References

1 http://www.pub.nl.ca/applications/MuskratFalls2011/files/comments/11-JM-2012-02-29-Rev1.pdf

2 http://www.exec.gov.nl.ca/exec/speeches/newport.htm

3 http://www.ferc.gov/market-oversight/mkt-snp-sht/2012/07-2012-snapshot-ne.pdf

4 http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2012&subject=0-AEO2012&table=8-

AEO2012&region=0-0&cases=ref2012-d020112c

5 Page 56 of the annual report references the 5.4 cents/hwhr

http://www.hydroquebec.com/publications/en/annual_report/pdf/annual-report-2011.pdf

6 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/CA-KPL-Nalcor-27-Rev1.pdf

7 Newfoundland Attorney General Vs. CFLCo (Goodridge Court Case 1983)

8 Newfoundland Attorney General Vs. CFLCo (Supreme Court of Appeal -1985)

9. SCC 1: Newfoundland: http://scc.lexum.org/en/1988/1988scr1-1085/1988scr1-1085.html

10. SCC2: Quebec http://scc.lexum.org/en/1982/1982scr2-79/1982scr2-79.html

11 http://www.assembly.nl.ca/legislation/sr/statutes/c5161.htm

12 http://www.ucs.mun.ca/~feehan/CF.pdf

13 1999 CFLCo Shareholders agreement

14 1998 Guaranteed Winter Availability Contract

15 http://bondpapers.blogspot.ca/2009/12/1969-churchill-falls-power-contract.html

16 http://en.wikipedia.org/wiki/Federal_Energy_Regulatory_Commission

17 http://www.exec.gov.nl.ca/exec/speeches/newport.htm

18 FERC Grandfathered Rights

http://www.spp.org/publications/FERC_TREATMENTOFGRANDFATHEREDAGREEMENTS.pdf

19 http://www.cbc.ca/onpoint/ [13:50 into interview of August 11, 2012]

20

http://www.nalcorenergy.com/uploads/file/nalcor%202010%20business%20and%20financial%20report

_final_may%203%202011(1).pdf

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=8-AEO2012&region=0-0&cases=ref2012-d020112c

http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2012&subject=0-AEO2012&table=8-AEO2012&region=0-0&cases=ref2012-d020112c

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

http://scc.lexum.org/en/1988/1988scr1-1085/1988scr1-1085.html

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

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

http://www.spp.org/publications/FERC_TREATMENTOFGRANDFATHEREDAGREEMENTS.pdf

http://www.cbc.ca/onpoint/

http://www.nalcorenergy.com/uploads/file/nalcor%202010%20business%20and%20financial%20report_final_may%203%202011(1).pdf

http://www.nalcorenergy.com/uploads/file/nalcor%202010%20business%20and%20financial%20report_final_may%203%202011(1).pdf



21 http://www.assembly.nl.ca/business/hansard/ga42session2/94-03-03.htm

22 http://www.gov.nl.ca/lowerchurchillproject/muskrat_falls_pub_final_report.pdf

23 http://www.cbc.ca/news/canada/newfoundland-labrador/story/2012/04/07/nl-on-point-jerome-

kennedy-407.html

24 http://bondpapers.blogspot.ca/2011/10/if-la-romaine-isnt-profitable-nlpoli.html

25 http://www.tomadamsenergy.com/2012/07/27/govt-interference-ruining-manitobas-power-

system/?utm_source=rss&utm_medium=rss&utm_campaign=govt-interference-ruining-manitobas-power-system

26 Page 42 of http://www.pub.nl.ca/applications/MuskratFalls2011/files/transcripts/Feb15-12.pdf

27 http://www.assembly.nl.ca/legislation/sr/statutes/e05-1.htm

28 http://bondpapers.blogspot.ca/2011/05/dunderdale-using-rigged-deck-against.html.

29 http://www.blakes.com/dbic/guide/dispute/html/contractual_liability_in_quebe.html

30 Minister Kennedy VOCM July 31: http://www.youtube.com/watch?v=kW1AHKs3dzQ

31 NTV interview Ed Martin Sunday August 19, 2012

32 http://www.pub.nl.ca/applications/MuskratFalls2011/files/rfi/PUB-Nalcor-5.pdf

33 http://www.pub.nl.ca/applications/MuskratFalls2011/files/mhi/MHI-Report-VolumeII.pdf

34 http://www.pub.nl.ca/applications/MuskratFalls2011/files/submission/Nalcor-Submission-Nov10-11.pdf

35 http://www.pub.nl.ca/applications/MuskratFalls2011/files/presentation/Presentation-Martin-Feb20-

12.pdf

http://www.assembly.nl.ca/business/hansard/ga42session2/94-03-03.htm

http://www.gov.nl.ca/lowerchurchillproject/muskrat_falls_pub_final_report.pdf

http://www.cbc.ca/news/canada/newfoundland-labrador/story/2012/04/07/nl-on-point-jerome-kennedy-407.html

http://www.cbc.ca/news/canada/newfoundland-labrador/story/2012/04/07/nl-on-point-jerome-kennedy-407.html

http://bondpapers.blogspot.ca/2011/10/if-la-romaine-isnt-profitable-nlpoli.html

http://www.tomadamsenergy.com/2012/07/27/govt-interference-ruining-manitobas-power-system/?utm_source=rss&utm_medium=rss&utm_campaign=govt-interference-ruining-manitobas-power-system

http://www.tomadamsenergy.com/2012/07/27/govt-interference-ruining-manitobas-power-system/?utm_source=rss&utm_medium=rss&utm_campaign=govt-interference-ruining-manitobas-power-system

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

http://www.youtube.com/watch?v=kW1AHKs3dzQ

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-Feb20-12.pdf

http://www.pub.nl.ca/applications/MuskratFalls2011/files/presentation/Presentation-Martin-Feb20-12.pdf



Appendix 1

Calculations to determine the $/MWhr costs of Muskrat Falls generation

Upper Churchill - The Unexplored Alternative (1)

Documents

Transcript of Upper Churchill - The Unexplored Alternative (1)