Newfoundland appeals dismissal of 5,428-MW Churchill Falls contract challenge

Nalcor Energy’s Churchill Falls (Labrador) Corp. has appealed a Quebec Superior Court judgment that upholds an agreement that requires Newfoundland to sell power from the 5,428-MW Churchill Falls hydroelectric project to Quebec for a fraction of its value.

The 1969 power sales contract between province-owned Nalcor and Churchill Falls (Labrador) and the neighboring province-owned utility, Hydro-Quebec, has long been a source for discontent in Newfoundland and Labrador Province. The contract expires in 2016 with a renewal for another 25 years to 2041.

Churchill Falls (Labrador) sent a letter to Hydro-Quebec in 2009 seeking a re-negotiation of the agreement but Hydro-Quebec did not respond. The Newfoundland utility then filed a motion in Quebec Superior Court commencing proceedings against Hydro-Quebec to amend the 1969 Upper Churchill Power Contract pricing.

Hydro-Quebec asked the Superior Court in 2013 to confirm that the hydropower generated by Churchill Falls would not be limited to monthly blocks and to block any attempted sales of power from Churchill Falls of more than 300 MW to third party buyers, including Newfoundland and Labrador Hydro. Hydro-Quebec contended the 1969 agreement gave it “certain essential rights” regarding the company’s role in contract disputes, including the power produced by the station through 2043 and to exert “operational flexibility” over the plant.

Superior Court Judge Joel Silcoff dismissed Newfoundland’s motion in July, indicating the Newfoundland parties had to abide by the agreement they made years before.

Churchill Falls (Labrador) filed an Inscription in Appeal Aug. 26 with the Quebec Court of Appeal, saying an appeal had been expected regardless of which party succeeded in superior court.

The Newfoundland utilities contend there is an obligation in the Quebec Civil Code for parties to act in good faith when fulfilling the terms of a contract, in the context of what the parties were seeking to achieve over the life of the contract, at the time of signing.

“We respectfully disagree with the judge’s ruling and more so have a grave concern that he did not address the essence of our argument that the duty of good faith requires renegotiation of the pricing terms of the power contract in the circumstances of this case,” Nalcor President Ed Martin said at the time of dismissal.

The present purchase price under the contract is one-quarter of one cent per kWh, and an automatic renewal clause fixes the purchase price at one-fifth of one cent for the 25-year period beginning in 2016. That means, for the remainder of the contract, power would be sold to Hydro-Quebec for less than 5 percent of its recent commercial value, Churchill Falls (Labrador) said.

Martin said, since the power contract was initiated, circumstances have changed in ways that could not have been reasonably foreseen at signing. Energy prices have escalated significantly, and access to export markets is now a possibility under open access regulations. The change in circumstances and the length of the contract has resulted in a gross inequity in the distribution of contractual benefits, according to Churchill Falls (Labrador).

“This action seeks a fair and equitable return to CF(L)Co from its sale of power and energy based on prices received by Hydro-Quebec in the Quebec market and in export markets, proportionate to Hydro-Quebec’s volume of sales in these respective markets,” Martin said.

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