The MOU: With Further Reflection – An Addendum

Since my post of January 2, entitled “An Initial Assessment of the New Chapter“, I have had the opportunity to listen to 2 interviews with the CEO’s of NL Hydro (NLH) and Hydro-Quebec (HQ) respectively. These 2 interviews contain information which I believe is material to the reader’s understanding of the post of Jan 2.  The interviews in question are:

1. La Tele Journal with Michael Sabia            https://www.youtube.com/watch?v=THmrumORmlI
2. The CBC interview between Jennifer Williams and Heather Gillis https://www.cbc.ca/player/play/video/9.6597441

They clarify again for the reader, the assertion contained in the “Fact Sheet” which the province of NL has produced, namely the forecast average Price HQ will pay CF(L)Co, over the 51-year term as shown in Figure 5.  At about the 3 minute mark of the CBC interview with Williams, the numbers in this plot are effectively confirmed. 

Within the interview with the CEO of Hydro Quebec, Michael Sabia reviewed Figure 6 to show what Quebec ratepayers could expect to pay for energy from the Upper Churchill with the changes.   

Again, there is a large difference between these numbers which should, for the sale of transparency, be explained by the Proponents in simple terms. 

The NLH CEO has identified that HQ are also using “mitigated numbers” where the HQ profits from their 35% ownership in CF(L)Co are applied to the rates to the consumer.  Figure 6 would also suggest that Sabia is presenting nominal or escalated costs rather than 2024 dollars.   

Within Table 1 of the January 2^nd post, the Annual Payments provided in Schedule G were discounted by 5.8% to arrive at the Net Present Value of 33.8 Billion.  Unit Rates were then calculated based on this data for (i) the NL View of Schedule G/Figure 5 – 5.8% escalation (ii) unit rates in 2024 dollars and (iii) unit rates escalated by 3% annually to align with publicly stated pledge of Hydro Quebec to maintain that cap on residential rates. 

As seen in Table 2, I have mapped each of these scenarios, showing both unmitigated, and mitigated views.  The impact of mitigation has been approximated simply by accounting for HQ’s 35% ownership (negating the operating costs prior to the 35% disbursement). 

As seen Table 2 correlates very well with what has been shared by the Hydro Quebec CEO (1, 2 and 4 cents in Figure 6), and reasonably well with the Government of Newfoundland forecast based on Figure 5 above. 

This again can be confusing to the reader so I have summarized all of this information on one chart:

What is also material to this discussion is that, based on the CBC interview with Heather Gillis, the CEO of NLH effectively identifies that within NLH their own internal modelling are forecasting 4% average escalation. It is worth starting the discussion at the 18:30 mark in the recording.

“Our forecast for how that price will change over time, using those indices that we have, of course who knows what will happen over 50 years, but we are estimating that it will increase about 4% per year, and that’s a pretty good increase in price”

To summarize in simple(ish) language of my current understanding:

• NLH has agreed to a price for existing Upper Churchill Power at 2.5 cents per kWh over the next 50 years in 2024 dollars.   
• The MOU and definitive agreements will have a set of indices to arrive at the escalation to be applied to the 2.5 Cents in 2024 dollars. 
• Within the “Our Chapter” website, used to explain the deal to the people of the province, the Government of Newfoundland and Labrador are presenting numbers (Figure 5) which are based on a 5.8% annual escalation.  Meaning their forecast is assuming that electricity rate that HQ pay CF(L)Co will increase 5.8% per year for the next 50 years. 
• Based on my simplified model, Hydro Quebec seems to be basing their internal estimates (and what is communicated to the public) at an escalation of 3%.  As per the Jan. 2 post, this 3% escalation would result in $115 Billion less revenue to CF(L)Co compared to 5.8%.  
• Internal within NLH their own forecast seems to be in the 4% escalation range per year.  For clarity of the reader, based on my simplified model of Table 1, CF(L)Co will receive $87 Billion dollars less from HQ with a 4% escalation compared to a 5.8% escalation over the life of the Agreements.

In addition to my previous questions the following are the important elements to be discussed within the current HOA proceedings:

Key Questions from Previous Post:

1. Is the 2.5 cents per kWh as the average rate over the 50 year term in 2024 dollars accurate?
2. Why did NLH agree to 2.5 cents per kWh?  Why was 41% of the NE Iso considered the best we can achieve?  This has to be considering in the context of Hydro Quebec CEO viewing this as a truly “remarkable” price. 
3. What discount to this 2.5 cents is attributable to terminating the 1969 Power Contract Early? 

 New Questions to Be Considered:

• Should my interpretation be correct, why are future Prices shown to the public (based on 5.8%) not consistent with what NLH seem to be using for internal purposes (4%), or Hydro Quebec (3%)? 
• If the $225 Billion is in fact based on 5.8% escalation, can the Proponents provide a sensitivity if the escalations of 3% and 4% were used? 
• Lastly considering the “waving the carrot” metaphor, was the pricing model for CF(L)Co made independently of the Gull Island development?  Do the numbers and deal for the renegotiation of the Upper Churchill stand on their own, without Gull Island proceeding?

After watching several interviews by NLH personnel, this was a very difficult negotiation. Williams and NLH have inherited a very difficult situation with Muskrat Falls, and from a utility perspective this MOU will solve the urgent needs for rate mitigation, and general needs for capacity and energy in the domestic market.  Does this MOU represent the best of a bad situation?

With further reflection there are some other items that should be debated over the next days.  For Gull Island our benefits are construction jobs and infrastructure related activity, some return on equity over the 50-year term, and most importantly 60% ownership in a future asset that post-2075 will be of great value.  There are four topics that should be considered in relation to Gull Island and are repeated here for emphasis:

1. Future market access (Post 2075) be articulated in the definitive agreements (Major Lesson from the 1969 Contract),
2. Offramp for exceptional changes in electricity markets (Upward).  As per the Upper Churchill Agreement there is no upside to NLH should there be an exceptional recovery in energy prices. It is worth understanding was a “offramp” considered?
3. If there is no “offramp” it is important to ensure that NLH could recapture and wheel Gull Island power into the markets through the HQ transmission system (As done today for the 300 MW UC recall).  As such wheeling access would provide some benefit if there is a large recovery in the Energy Markets, and the Labrador demand does not grow as expected.   From the interviews with NLH, it seems as if the recapture is only being considered for domestic demand.
4. Although employment priorities are written in the environmental review, it would be very important to ensure that the local supply chain are provided fair and full opportunity during the development phase.  If this is a HQ managed project, it is important that the local supply chain are on a equal footing with Quebec suppliers who would benefit from frame agreements, and history of working together.  For those with experience in project development it is clear this is a very important that this is a written and enforceable requirement.