New Deal Sought on Huge Power Contract

MONTREAL (CN) - The province of Newfoundland and Labrador, owner-operator of one of the largest power plants in the world, wants to change a longstanding power contract that allows Hydro-Quebec Corp. to buy electricity at bargain basement prices - less than 5 percent of the market rate.

Plaintiff Churchill Falls (Labrador) Corp., owned by Nalcor Energy, a wholly owned corporation of the Government of Newfoundland and Labrador, operates the power plant on the upper Churchill River in Labrador. Nalcor owns 65.8 percent of Churchill shares, and Hydro-Quebec, owned by the Government of Quebec, owns 34.2 percent of the corporation.

The lawsuit in Superior Court stems from a 1969 contract between Churchill and Hydro-Quebec for sale and delivery of approximately 30 billion kilowatt-hours per year of hydroelectric energy to Hydro-Quebec, for 44 years, with automatic renewal for an additional 25 years, terminating in 2041.

The parties agreed on a price of 2.9427 mills per KWh, enough to cover Churchill's debt requirements at the time and to provide enough revenue to maintain the plant.

The contract came to fruition when Churchill sought a buyer for the excess energy the plant produced. The plant produces 33.8 billion KWh per year, according to the complaint.

"Ultimately, the only potential purchaser was Hydro-Quebec since its sole shareholder, the Government of Quebec, had made it clear that in no circumstances would Churchill be permitted access to the U.S. or other Canadian markets though Quebec, which at the time was the only feasible route to those markets," the complaint states.

The current contract price is one-quarter cent per kilowatt hour, and the automatic renewal clause fixes the purchase price at one-fifth of a cent for the 25 years beginning in 2016.

Under those terms, for the rest of the contract, Hydro-Quebec will be paying less than 5 percent of going rate for electricity, the government says. When the contract was executed, both sides thought the price of electricity would decline over time.

The pricing fiasco set off by U.S. deregulation was years in the future, an increase that occurred, oddly enough, along with the rise in so-called "competitive energy markets."

The complaint states: "The concept of good faith in the performance of the contract embraces the concepts of fair play and the spirit of justice. In the light of these principles, the pricing terms of the contract are grossly unfair."

The government says that in 1969, neither party had reason to believe that electricity market prices would escalate, nor could they have predicted that open access regulations would enable Churchill to transmit energy through Hydro-Quebec's transmission network to the U.S. or other markets.

Churchill President and CEO Ed Martin says a letter was sent to Hydro-Quebec last year seeking renegotiation of the pricing terms, but Hydro-Quebec did not respond. The government wants the contract rescinded within 6 months of court the court judgment.

Churchill's legal counsel is Irving Kalichman and Stikeman Elliott.

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