“CPI Indexing” of Churchill Falls Energy Price Dodges the Truth about Quebec Favoured MOU

The announcement of the “Definitive Cooperation and Implementation Agreement” (DCIA) now referred to as MOU 2, proclaimed that Churchill Falls (CF) energy was a “Straight forward pricing model for Churchill Falls contract with built-in escalation and further price increases if inflation is higher than expected.”

In an interview with CBC following the announcement Premier Wakeham is quoted when asked about the CF pricing as stating “Well, all I can say is if you look at the total value of what we’ve achieved, we have more value. We have more money … And we’re following the recommendations, what financial people are telling us is how we should account for that. And we do have an inflation factor built in. If inflation goes above two per cent, there will be adjustments to it.”

The Government of NL is portraying that CF pricing will be tied to changes in the Consumer Price Index (CPI) over the life of the contract. These statements are not factual and have clearly misled the NL public. People commenting on public and social media have taken away an understanding that CF pricing is indexed to the CPI. The impression that people are forming is that if general inflation increases in any one year of the contract (beyond 2%) then the energy price and payments will go up from HQ. This is indeed what Government has communicated but it is untrue and very misleading.

These statements are not borne out by the agreement signed on August 17^th, 2026. First and foremost, people should understand that there is no indexing of prices to CPI in MOU 2.

When people think of indexing they think about their retirement income. Does income go up as CPI increases? Well, we know that Canada Pension Plan benefits, for example, increase based on inflation in the prior year. The federal government compares the average consumer prices over a 12-month period ending in October with the previous 12-month period and adjusts CPP payments in January each year. So, people think that CF pricing is similar to CPP adjusted annually by CPI – the fact is that CF energy prices are not indexed in MOU 2.

CF Pricing

The MOU 2 has agreed established annual payments for energy based on specified quantities of energy sold to Hydro Quebec (HQ) from CF(L)co for a 51-year period. These payments are set forth in MOU 2 similar to the annual payments agreed in MOU 1. This is unlike MOU 1 where the HQ payments were stated to be annual forecast or targeted payments which would be tied to various undisclosed factors. While the IRC report did not disclose the basis for the MOU 1 HQ payments it did, however, note that “…most of the negotiated weights are on Québec regulated electricity rate and replacement costs…” In other words, there was no significant link to electricity market pricing outside of Quebec as portrayed by public officials. The HQ network within Quebec is highly regulated and would not be a reflective index of any competitive market- based pricing for electricity. There was no market-based pricing in MOU 1 and there is no market-based pricing in MOU 2.

The CF pricing in MOU 2 is much more transparent than in MOU 1. In fact, it is very much set, or established. It is pre-determined and agreed. In addition,there is low probability that any change in pricing or payments will occur over the 51-year term of the proposed contract. There is again no link to market pricing of energy in MOU 2. As stated, one should not expect any significant change in pricing or payments from HQ other than those specified and agreed in Annex D of MOU 2.

So-Called CPI Indexing

What does the CPI indexing reference really mean? Are we to get paid more when inflation is beyond 2% as stated by Premier Wakeham?

In the summary analysis to follow, I will attempt to explain what CPI indexing means in MOU 2. I will start by stating that the references to CPI  in MOU 2 are designed to guarantee the agreed annual payments from HQ and the CF pricing for the entire 51-year term of the agreement. The CPI references are not designed to index the payments to general inflation as it changes over time such as occurs with CPP annual payments. The public statements that are being made totally misrepresent the wording of MOU 2.

It is complex scheme to explain but detailed analysis depicts how it works. As stated, the annual payments are shown in Annex D and there is a potential adjustment that could occur for a given year over the 51-year term that depends on how much cumulative change occurs in the CPI index (Statistics Canada all item index , monthly, non-seasonally adjusted) over time and whether it falls outside a certain ratio range which widens each year of the contract. So, what does that mean?

After the initial year of the contract (2028) CPI index change would be  reviewed for the prior 12-month period (12-month period would run from October 2026 to September 2027) for the year 2028 review. This 12-month timeframe would advance each year. So the 2029 year review would be based on the October 2027 to September 2028 period. Once the average CPI index for 2028 is determined, it is divided by the CPI index in the start year. This calculation will show as follows at various increases in inflation during the twelve month period for the first year of the contract.

If the CPI ratio is between 1.0166 and 1.0246 in year one then the HQ payment is as agreed in Annex D of MOU 2. If the CPI ratio is below the1.0166 in year one then the payment is lower marginally. If it is above 1.0246 the payment is adjusted marginally higher. 

For example, if average inflation is at 1% in year one then the CPI ratio is 1.0098 which is below 1.0166 , if that were to happen the payment from HQ would be $0.597billion (the agreed payment for the year X 1.0098/1.0166), a decrease by $4 million for year one. If year one inflation is 3% then the payment would increase marginally by $3 million. The effect of this is to cover some risk but it is really to ensure the agreed annual payments and pricing are secure. They are not meant to compensate for annual inflation. If for example, year one inflation was high at  5% the payment increase only changes that year one payment by 2.5%, or $15 million.

The CF pricing in MOU 2 is essentially designed to achieve a very low probability of change as time moves forward. How is that one asks? Because the way the CPI ratio formula is designed the upper and lower ranges expand exponentially with time. What does this mean? The range in the CPI ratio starts at 1.66% to 2.46% after year one of the contract in 2028 and as it moves year after year in time, it expands to capture cumulative exponential change. The CPI ratio range is as follows for select years (five-year intervals) forward to the contract end date:

As shown above the  CPI ratio range for cumulative change widens significantly with time. Therefore, there is very little probability as time goes forward that the CPI index will range outside of the lower threshold and the upper threshold for the CPI ratio that could affect annual HQ payments and CF prices. There is some probability for marginal price adjustment and HQ payment change over the very short term (first 5-10 years) but the probability is very low over the long-term.

In order to access the risk of CF price and HQ payment change in any one year of MOU 2, an analysis of past inflation and CPI follows. The analysis is based on Canada’s past inflation for the years 1990-2025. The selection of this time period is consistent with the period in which Canada’s monetary policy has adopted target control over inflation, which commenced in February 1991. The table below substitutes actual average Canadian inflation rates for 1990-2025 as will be calculated under Annex F of MOU 2 as years 1-35 (2027-2061) of the agreement to test its results.

As demonstrated, pricing mechanism in MOU 2 is not designed to index with CPI. It is not designed to adjust prices or payments for HQ when and if average annual inflation is higher than 2%. That is not what the public understands is to occur based on the public statements and information released by government officials. People think high inflation in certain years will increases prices in line with CPI that is not the case. The pricing is a derivative of the stated and agreed payments in the Annex D of the new MOU 2. The CPI mechanism is to ensure these payments are indeed what occurs.

As an example, you can look to the most outlying years of covid which are years 31-32 above. Average annual inflation was relatively high year after year at 6.29% and 4.77%. But the way the CPI mechanism accumulates exponentially under MOU 2, the CPI ratio range is so wide that even these very high back-to-back years result in no price or payment adjustments. In fact, these years are well within the CPI ratio range and inflation would have to be totally out of control, at record levels never experienced in Canada, annual inflation would have to be at, or above, 24.4% in year 31 to result in a change in HQ’s price or annual payment for that year.

In conclusion, if CPI change mirrors the past 35 years there will no material price result from the MOU 2 for CF energy over the entire life of the 51-year contract. It is as good as set in stone. HQ has ensured that it will reap tens of billions of dollars in market value from the renewal of the CF energy, all at the expense of the NL people. The difference between market price and the prices agreed in MOU 2 are virtually guaranteed to flow to HQ. Statistically, pricing is over 99.5% assured.