The Secret Hydro Deals
CF(L)Co inks deal to sell more electricity to Hydro Quebec
In December last year, NALCOR-Hydro and Hydro Quebec signed a deal to sell HQ up to two terawatt hours of electricity a year between 2022 and 2026 over and above the electricity HQ gets under the renewal agreement for the 1969 power contract.
The only public disclosure of the agreement came in a total of three sentences in two documents. No news release. No news conference. No mention of it at the NALCOR-Hydro general meeting.
You’d have to go deep into a bunch of reports to find the two sentences in Note 20(c) of Churchill Falls (Labrador) Corporations’s 2021 financial statements:
In December of 2021, CF(L)Co entered into an agreement for the sale of excess energy to Hydro Quebec. The Agreement has a term of 5 years.
You would also have to troll though Hydro-Quebec’s 18-K filing with the United States Securities and Exchange Commission - posted at HQ’s website in May of this year - to find this single sentence:
In December 2021, we signed an agreement with CF(L)Co to purchase additional energy until August 2026, up to a maximum quantity of 2 TWh annually.
Assuming you found that information, you’d then have to email HQ and N-H to get more.
Good luck with that.
HQ: “Unfortunately, we cannot provide any more information than what is in the 18-K publication as it is a confidential agreement.”
An email to N-H asked for two separate pieces of information:
Are you able to send me a copy of the agreement? Given that all other agreements of this kind, including the GWAC, are public that should be possible.
As well, would you tell me the rate at which HQ can purchase up to 2 Twh a year?
Note the preamble. The 1969 Power Contract, the renewal agreement, and the Guaranteed Winter Availability Contract are public. Even the revised CF(L)Co shareholder’s agreement is available publicly.
So maybe you could give me this one as well.
And what rate is HQ paying?
The NALCOR-Hydro reply came from The Upside Down:
The terms of this CF(L)Co agreement are confidential, which is consistent with all of Hydro's energy marketing bilateral agreements of this nature. To release the agreement would be a breach of our contract with HQ. Further, these contracts contain commercially sensitive information. The confidentially of these agreements is critical to ensuring our ability to negotiate future contracts with other parties in the best interest of the province.
All similar agreements are public. Yet the official reply - likely drafted by someone other than the person who sent the email - comes from an alternate reality.
A follow-up email to that reply asked about any connection between this agreement and the recently resolved dispute about the renewal agreement, the law suit over it, and the Annual Energy Base.
Oh yeah, and what rate are they paying for the electricity?
A lot of words came back but none really explained the history of the dispute well. Read on for the whole story.
And no response on rates.
CF(L)Co's ability to now sell excess energy is the outcome of the 2019 Quebec Court of Appeal decision in the Declaratory Judgment Case regarding interpretation of the Renewed Power Contract. Under this court judgment, CF(L)Co was given the right to energy produced at the CF(L)Co plant, if any is available above HQ's annual contractual entitlement (referred to as "Continuous Energy") under the Renewed Power Contract.
So what about rates went the reply to that?
The silence from NALCOR-Hydro ended the conversation.
It took a message to the provincial energy minister to get - very early the next morning - a few sentences about what led up to the secret deal (already public information or easily figured out from public info).
There was comment in that reply that the details of the secret agreement were secret - by agreement of H-Q and CF(L)Co - under clause 15.3 of the secret deal. H-Q owns 35% of CF(L)Co shares, by the way. NALCOR-Hydro owns the other 65%.
Arguably, even disclosing that there was an agreement to secrecy between CF(L)Co and Hydro Quebec and giving the number of the secrecy clause violated the secrecy agreement. Thinking about that just adds to the nightmarishly complex, bizarre, and illogical ways of bureaucracy in Newfoundland and Labrador, though. Let’s just stick with the Kafkaesque nature of the rest of the story.
Plus, there was also information in the minister’s reply not of this five-year secret contract but a second secret deal no one had mentioned publicly at all - called the Short Term Excess Energy Agreement - that involved the sale of surplus electricity to Hydro-Quebec for the month of August 2021.
So not one secret deal, but two.
And still no idea how much HQ is paying for the electricity.
To find out what’s going on in Newfoundland and Labrador, you can become a Bond Papers paid subscriber.
Not a problem.
The information HQ and N-H won’t tell is actually already in public.
CF(L)Co has this extra electricity as a result of the renewal agreement to the 1969 power contract with Hydro-Quebec. A court case launched by Hydro-Quebec asked the court to settle competing interpretations of the renewal agreement to the 1969 power contract.
There was another dispute between HQ- and CF(L)Co about setting the /nnual Energy Base or AEB. That’s the term set out in the contract that determines how much electricity Hydro-Quebec gets.
The issue in court was whether Hydro-Quebec got all of the AEB and whatever else the Churchill Falls plant produced - less the Recall block and the TwinCo block - as it had under the original contract, or whether there is a cap on the total, set monthly. In simplest terms: NALCOR-Hydro believed there was a monthly amount (AEB divided by 12). Hydro-Quebec thought it was just the AEB, full stop, less the two blocks for Newfoundland and Labrador plus the Guaranteed Winter Availability or GWAC.
The lower court in Quebec agreed with Hydro Quebec that the renewal was the same as the original contract. HQ got all the power, at its discretion. The Quebec appeals court agreed with NALCOR-Hydro, in part. H-H claimed in 2019 that it had won the case but as SRBP pointed out at the time, it wasn’t quite that simple.
The 2019 decision from the Court of Appeal accepted the NALCOR-Hydro idea that there was a cap on the total electricity HQ could get but only really changed the outcome in a small way from the the Superior Court’s decision. Rather than calculate the cap monthly, as N-H wanted, the cap was annual.
But that doesn’t mean CF(L)Co can do what it wants with the rest.
Water management has always been the crucial issue and that effectively remains with Hydro-Quebec. HQ still has “the rights conferred … under sections 4.1.1 (Operational Flexibility) and 5.3 (Firm Capacity Schedules) of Schedule III to the May 12, 1969 contract [that] provide it with an operational flexibility very similar to the operational flexibility it enjoyed since the commissioning of the Upper Churchill plant….”
That includes “the right to schedule and plan its energy and power requirements and to postpone (or accelerate) the delivery of energy from one month to another, the whole without being limited to a quantitative cap established pursuant to the concept of Continuous Energy on a monthly basis.”
There’s another limitation.
Until “August 31, 2041, CF(L)Co cannot sell to a third party, or use for the benefit of a third party, including Newfoundland and Labrador Hydro (“NLH”), any quantity of power whatsoever, with the exception of the power associated with the “Recapture” (300 MW) and “TwinCo” (225 MW) blocks, and, since September 1, 2016, the power associated with the energy produced by the Upper Churchill plant over and above the value of the Annual Energy Base, regardless of whether such sales, or use, are made on a firm or interruptible basis.”
You can see pretty quickly how skimpy were the NALCOR-Hydro responses either to your humble e-scribbler, the province’s energy minister, and certainly not to anyone who read the company’s financial statements.
And to make it really clear, that’s where these two contracts come from. It took about three years for CF(L)Co and HQ to negotiate a settlement using the Quebec court decision as the basis. They agreed on how to set the AEB. In a creative burst, the lawyers called the settlement agreement the Settlement Agreement.
They reached that deal in August 2021. It included retroactive payments to CF(L)Co for electricity HQ received after the renewal started on 01 Sep 16 and lasting until the agreement in August 2021. The total amount received each year between 2016 and 2021 was 2 Twh. HQ paid about $5 million a year for each of the five years. The price was the amount set out in the renewal agreement. There are two different figures for the settlement of the oversupply: $24 million and $25 million. Both give you about two tenths of a cent a kilowatt hour.
HQ and CF(L)Co also cut a deal to cover power received specifically in August 2021 - that’s the second secret agreement in the minister’s reply to Bond Papers. Then they signed a deal for five years from 2021 to 2025 that covered the same thing. While we don’t know the price with 100% certainty, it’s highly likely to be the same price as the renewal contract.
Literally, none of that is secret. The court cases are easily available online. The 1969 power contract, the renewal, the GWAC, and so on are all online. You can even get a censored version of a briefing note energy minister Andrew Parsons got last August. It doesn’t explain details as clear as what you just read but it is close enough for government work. If you want a laugh, check it out. The department censors clipped out two bits where the briefers summed up the arguments the parties made in court and that were reported in the final decisions.
A couple of needlessly secret agreements and a story that NALCOR-Hydro didn’t want to tell for some reason. If some of you are wondering why all the fuss, then you are asking exactly the right question. It’s not a question for Bond Papers, though. There’s no fuss here. Just a funny story and a bit of news.
It’s a question for the provincial government.
That’s not the whole story, either.
The CF(L)Co statements mentioned Muskrat Falls as well.
Check back tomorrow morning (Tuesday) for that one.
Some people are still not paid subscribers to Bond Papers. Hard to believe but it is true.