Background
On January 6th PlanetNL wrote a piece on the blog that suggested an association between the payments to CF(L)co for the period 2025-2041 as a loan which would later be recovered with interest at about 5.8% to Hydro Quebec (HQ) over the period post 2041. It was also concluded that indeed NL Hydro had given HQ full value for the existing contract to 2041 at current fixed pricing of 0.2 cents/kWh. Put more simply the existing contract remains intact; it was not torn up. It remains in place to August 31st , 2041.
All my previous posts have been founded on the basis that the MOU is a fixed value contract at $33.8 billion (2024$) derived from discounting the nominal dollar values in Schedule G at the stated discount rate in the MOU of 5.822%. This determines a real average price of about 2.5 cents to CF(L)co over a term of 51 years, as confirmed by several others who have independently analyzed the MOU value and pricing. To date, no representative of NL Hydro has refuted any one of those analyses. The effective price to Hydro Quebec, with its 34.2% ownership stake, is even less, at 1.6 cents.
In the meantime, NL Hydro representatives have concluded their presentations and webinars without ever explaining the pricing, or the foundations to their charts of pricing. NL Hydro (NLH) did publish a nominal price chart which assisted in refining the details of the analysis that would follow. NLH continue to broadcast the billions of dollars the NL treasury is supposed to realize but without any reference to the pricing that is going to produce that result. To date, NL Hydro has continued to repeat that both parties agree that the average effective real price is actually 5.9 cents/kWh, or a price that is 30 times the current contract price of 0.2 cents. This is despite the fact that there is no reference to any such pricing in the MOU. The one thing we do know is that the existing Churchill Falls (CF) power plant is a “Money Machine”. It is public information that in 2023 HQ realized revenues of over three billion dollars from the resale of CF power it purchased for next to nothing. One has to always keep that number in mind when you reflect on judging the value of the MOU, how little of that value NL is realizing and how much HQ is going to continue to reap from this “Money Machine”.
MOU Pricing Scheme
A month following the announcement it is clear that NL Hydro are not about to disclose the MOU pricing methodology; therefore, it is necessary to attempt to explain why NL Hydro will not disclose the basic pricing in the MOU. To start let’s focus on the so-called “effective average price of 5.9 cents”. The nominal dollar values in Schedule G for each year from 2025-2075 are provided (see table below-Column A). These are the payments HQ will pay CF(L)co for the actual energy it purchases. Next these values are discounted by 3% per year to reflect the stated annual price escalation that HQ states it wishes to maintain for the ratepayers of Quebec (Column B). Using the nominal price chart provided by NL Hydro (Column C), the actual quantity of electricity sold by CF(L)co to HQ annually can be determined (Column D).
The weighted average of the prices in Column E derives the “effective average price” being quoted by NL Hydro and HQ – 5.92 cents/kWh. Upon closer examination of the pricing as stated in 2024$ in Column E, one can readily notice anomalies. As depicted in Column E, the pricing in 2024$ is constant for the five-year period 2036-2040 at approximately 4.65 cents per kWh (highlighted in blue font). Another period of constant pricing follows for the six-year period 2041-2046 at approximately 4.97 cents per kWh (likely the target was 5 cents/kWh highlighted in red). These prices are by design and are an integral component of the pricing scheme that establishes the $33.8 billion present value of the MOU. Specifically, constant year-after-year pricing in real terms does not align with the political message of increasing prices and prices tied to market indices. Little wonder NL Hydro will not disclose pricing details. The analysis clearly demonstrates that so-called market indices for blocks of power are going to adjust prices at pre-determined intervals. These mechanisms are designed to meet the stated intent in the MOU that the present value of annual payments by HQ for CF power to CF(L)co will total $33.8 billion present value. In other words, the MOU is a fixed value contract for the existing CF power.
But what is most interesting from the analysis in the table above occurs in 2065, ten years before the expiry in 2075 of the renewal in the MOU. The price in real terms peaks at 9.34 cents/kWh (see the chart below). This is a cap on the pricing which is well below any of the replacement costs quoted by the parties. In fact, it is significantly below even the lowest replacement cost for power from Gull Island which is quoted by the parties in the joint press release of Dec. 12th, 2024, to be 11 cents/kWh. “Prices for the production from the new developments will be based on actual construction and operating costs and will escalate over time. On average, the price is expected to be 11 cents/kWh.” After 2065, HQ will continue to buy existing CF power at well below its cost for Gull Island power. Why, we must ask? Further discussion of this issue will be addressed later.
One of the most revealing facts from the analysis, is that the addition of the payments HQ pays to CF(L)co in the years 2025-August 2041(date of contract expiry) under the MOU, results in a total value of $14.48 billion in 2024$. The result is the addition of Column B for years 2025-2040 plus 8/12 of the value in 2041, to represent the portion of the year to expiry of the 1969 agreement. It is important to note that $4.84 billion of the $14.48 billion total, is HQ paying themselves through their ownership in CF(L)co (34.2%). The remaining $9.64 billion represents the present value of the advance payments that benefit NL.
The next obvious question – is how does HQ get repaid? The repayment side of the pricing scheme is built into the rates from Sept. 2041 to 2065, where rates in 2024$ are consistently below the peak rate which is reached at year 2065 – 9.35 cents/kWh. Taking the difference between the 2024$ rate for each year during this period (Column E) and the peak rate of 9.35 cent/kWh in 2065, the value ($14.43 billion) of the lower rates corresponds almost exactly with what HQ paid on a present value basis prior to the 2041 expiry (see the table below). This is obviously by design it is not a coincidence. The numbers are too exact not to be programmed to be equivalent. The variance is but a rounding error in calculations and can simply be explained by the August 31st cut off which assumes equal energy by month during the year 2041.
The inescapable conclusion is that NL Hydro agreed to pass on the entire benefit of the existing contract to HQ. As a consequence NL Hydro has gifted HQ an enormous saving equivalent to tens of billions of dollars in capital investment that they would have expended in the decade before 2041 to replace CF supply. And NL Hydro got absolutely nothing in return for this gift. The MOU is clearly an extension of the 1969 contract. All of the funds advanced prior to August 2041 have been repaid dollar for dollar by way of lower rates from Sept. 2041 to 2065, when the contract price reaches its cap at 9.35 cents/kWh (2024$).
Next question – Did HQ advance the funds without interest? Certainly not! This is a more challenging question but there is a reason why the rate reaches a cap of 9.35 cents per kWh in 2065. This is like everything else in the pricing scheme, it has a purpose. The cap is obviously substantially below the replacement cost of CF power. It is also exactly 85% of the stated price of power expected from Gull Island. This discount is likely reflective of the interest costs HQ is charging NL Hydro for the funds advanced prior to August 2041. The present value of the lower rate as compared to Gull Island over the period to 2065 is $9.85 billion. This is too large a value to represent interest only as the implied interest rate would be an astronomical 9.4%. It is more likely that it represents more than interest costs only. If we assumed the interest rate was the agreed discount rate in the MOU (5.822%) which appears to be HQ average cost of capital (an assumption) then interest would represent $5.81 billion in 2024$. The remainder of just over $4 billion is most likely to represent the HQ equity contributions to NL Hydro being repaid to HQ.
HQ did not include any of the additional $9.85 billion (present value) benefit in the annual pricing because it would have meant making those payments to CF(L)co which would require sharing those payments of interest costs and equity contributions with NL Hydro. That could not work to effect the repayments for interest and equity directly to HQ. Hence, the further discounted rate for power from Churchill Falls to compensate them accordingly. And at a very high interest rate compared to other current borrowing rates of Government.
What about the decade 2066-2075? It is clear that at year 2065 there is a pricing departure in the MOU with regard to existing power from CF plant. At this point rates are capped at 9.35 cents/kWh in 2024$ and remain constant at that rate for the last decade of the MOU. The escalation from 2065 is forecast to simulate the two percent annual increase on expansion projects on the Churchill River. This is yet another enormous giveaway by NL Hydro. But it is so consistent with the 1969 contract – the add on of a large block of years at substantially discounted power rates for doing the deal. Just what we are living with today – 25 years add on at constant rates! Little wonder HQ executives are stating the MOU is the same as the 1969 contract. They are saying it because in every respect it has all the same elements – Nothing Has Changed!
In summary, the MOU is a concocted scheme that maintains all the workings of the 1969 contract. At every juncture it favours HQ and at enormous costs to the people of Newfoundland and Labrador. NL Hydro officials are but an extension of our misguided politicians. The only reasonable conclusion from all of this is that the entire exercise is politically motivated. The timing of the announcement just days before Christmas, the immediate media blitz and exuberant misrepresentations, the meaningless four-day debate on the last day of Christmas, and the outright denial of any public disclosure or independent review, all point to one purpose: an MOU for an election campaign. As the saying goes – “it won’t be long now!” What a giveaway of our heritage! The last real economic hope for the future of our Province being given away with high celebration. The mighty Churchill River – what an enormous loss of economic wealth – the greatest by far in our history. The infamous Muskrat Falls “boondoggle” will long be forgotten when the MOU gets signed-off.