A deal revealed

Back in November 2007, Newfoundland and Labrador Hydro, Hydro-Québec, and the Iron Ore Company of Canada announced a deal involving the generally little-known Menihek hydro plant in the northwest corner of Labrador.

The plant was built by IOC in the 1950s to supply the mining operation and townsite at Schefferville. Located at Menihek Narrows, the plant uses the hydraulic power of the Ashuanipi River as it turns into the maze of lakes and channels that are the highest part of the Churchill River watershed – the Upper Upper Churchill, if you will. (The tailrace of the Menihek plant is clearly visible on Google Maps.)

That announcement is worth reproducing here in extenso:

Newfoundland and Labrador Hydro, Hydro-Québec and Iron Ore Company of Canada reach an agreement to supply electricity to three northern Québec communities

November 15, 2007 - Newfoundland and Labrador Hydro (NL Hydro), Hydro-Québec and the Iron Ore Company of Canada (IOC) announced an agreement today to supply electricity to the communities of Schefferville, Kawawachikamach and Matimekosh-lac-John, Québec.

IOC built and installed the Menihek/Schefferville interprovincial electrical system in 1954 to support its mining operations and supply electricity to the Town of Schefferville. Through this agreement, NL Hydro and Hydro-Québec have assumed ownership of the Labrador and Québec assets and infrastructure respectively from IOC. Hydro-Québec has also purchased the distribution system assets for the Town of Kawawachikamach from the Naskapi Nation of Kawawachikamach.

NL Hydro and Hydro-Québec have entered into a 40-year power purchase agreement to supply electricity to Hydro-Québec for its customers in Schefferville, Kawawachikamach and Matimekosh-lac-John. Hydro-Québec will purchase a guaranteed minimum of 40-million kilowatt hours annually from NL Hydro. Hydro-Québec will also reimburse NL Hydro for all operation, maintenance and refurbishment costs for the Labrador assets of the Menihek/Schefferville electrical system.

“We have negotiated a good agreement for the sale of energy to Hydro-Québec,” said Jim Keating, NL Hydro’s Vice President of Business Development. “We retain control over a provincial asset and resource and are adequately managing our financial and operating risks. The agreement also includes an annual escalation of price with the Consumer Price Index and the right to recall the power if required.”

Both NL Hydro and Hydro-Québec will enter into a contract with the current operator, Kawawachikamach Energy Services Inc. (KESI), a First Nations company, to operate and maintain the Menihek/Schefferville electrical system. The contracts will allow staff currently familiar with operations to continue, and will ensure continued involvement of the communities that are served by the Menihek system.

Terence F. Bowles, President and CEO of IOC said, “We are very pleased to have concluded this agreement which assures the continued operation of this long-life asset that was originally constructed by IOC’s pioneers. It can now continue to serve the needs of the Schefferville area for many years to come. This is an excellent example of sustainable development at work, supporting our Northern Communities.”

The power generated from the Menihek Generating Station is the only source of electricity for this isolated area. The continued operation of the Menihek Generating Station will supply Hydro-Québec’s customers in Schefferville, Kawawachikamach and Matimekosh-lac-John, Québec with a safe, reliable and economic source of electricity.

A couple of things worth noting. First, the use of the present perfect verb tense: “NL Hydro and Hydro-Québec have entered into a 40-year power purchase agreement”. Let's come back to that later.

Second, the fact that the Williams Provincial Government did not issue any press release on the subject.

This was rather a conspicuous omission, given that Danny Williams himself – along with he who shall not be named in Tory circles – announced the 2004 renewal of the Upper Churchill recall deal from 1998, and that Danny Williams himself, along with, six paragraphs into the release, announced the 2009 renewal of the recall agreement and the curious agency arrangement with Emera Energy.

Himself also got to announce the Hebron agreement, just a few months before the Menihek announcement, and again with the notional Natural Resources minister relegated to the deepest, darkest, eighth-paragraph recesses of the press release. And just a few weeks later, there was Himself announcing the White Rose Expansion, with the notional minister making an appearance five paras in.

There was Himself, taking full credit for the AbitibiBowater expropriation, in which certain resource and land titles in central Newfoundland were “repatriated” to the province from some unspecified location elsewhere in the world.

In January 2009, Himself announced the deal to cleverly improve the Voisey's Bay project by delaying it, with herself again playing second fiddle six paragraphs down.

And again in 2009, Himself announced the Hibernia South agreement, and yet again the notional line minister got buried in the fifth paragraph.

So Himself has never been shy about taking credit for resource deals, resource mega-projects, super-duper-megaprojects, ultra-hyper-combo-maxi-do-diddley-megaprojects, or even marginal tinkering with existing agreements.

But, conspicuously, the Menihek agreement, stands alone as an exception. His name was left out of it. No Minister's name, no government department, no one besides the two crown corporations and the private-sector dis-acquirer of the Menihek plant have any fingerprints on the deal.

In fact, the deal got virtually no notice in the local press even at the time its principals announced it. The press release was issued on a Thursday. The only mention it received was an unattributed minimal re-write buried on page D6 of the business section of The Telegram two days later:

Newfoundland and Labrador Hydro, Hydro-Quebec and the Iron Ore Company of Canada (IOC) announced an agreement Thursday to supply electricity to three towns in Quebec. Under the deal, NL Hydro and Hydro-Quebec assume ownership of the IOC generating facilities built and installed by the iron ore company at Menihek-Schefferville in 1954.

The Menihek generating station is the only source of electricity for the isolated towns of Schefferville, Kawawachikamach and Matimekosh-lac-John.

NL Hydro and Hydro-Quebec have entered into a 40-year power purchase agreement to supply electricity to the three towns.

Hydro-Quebec will purchase a guaranteed minimum of 40-million kilowatt hours annually from NL Hydro. The Quebec utility will also reimburse NL Hydro for all operation, maintenance and refurbishment costs for the Labrador assets of the Menihek/Schefferville electrical system.

“We have negotiated a good agreement for the sale of energy to Hydro-Quebec,” said Jim Keating, vice-president of business development for NL Hydro. “We retain control over a provincial asset and resource and are adequately managing our financial and operating risks. The agreement also includes an annual escalation of price with the Consumer Price Index and the right to recall the power if required.”

The financial details were not disclosed.

Note that final line, expressed in the passive: “The financial details were not disclosed.”

As indeed they weren't.

Well, at least not by Newfoundland and Labrador Hydro, Hydro-Québec, or IOC, on the day of the announcement.

However, a provincial government regulatory body has quietly made the contract available to the curious public to examine, which means this corner can now furnish gentle readers with some of those curiously-undisclosed financial details.

Such as these ones:

ARTICLE 4
PRICE OF POWER AND ENERGY

4.01 The price to be paid each Month during the term of this Agreement for Power and Energy to be delivered by N&L Hydro to Hydro-Québec under this Agreement shall consist of:

i) an energy charge of $0.030 per kilowatthour (hereinafter referred to as the “Minimum Energy Charge” shall apply to the first 40,000,000 kilowatthours of energy delivered in a Contract Year; and

ii) an energy charge of $0.020 per kilowatthour (hereinafter referred to as the “Supplemental Energy Charge”) shall apply to all energy delivered above 40,000,000 kilowatthours in a Contract Year.

4.02 The Minimum Energy Charge and the Supplemental Energy Charge shall be adjusted each Contract Year during the term of this Agreement, up or down as the case may be, in accordance with the Consumers Price Index for Canada, All Items [...]

The first sub-article gives Hydro-Quebec a volume discount on any power it needs above the 40-million kwh minimum purchase. The second sub-article indexes the prices to inflation – a concept likely better known to the general public as an “escalator clause”.

So, starting in year one of the forty-year contract, Hydro-Quebec paid Newfoundland and Labrador Hydro three cents per kwh for most power, with the price dropping to two cents per kwh once the volume discount kicks in, and rising (or, conceivably, falling) since then, and for the life of the contract, in line with inflation. This makes the juice from Menihek almost as expensive as the “cheap” fourteen-cent per kwh stuff that would be transmitted from Our Dear Dam at Muskrat Falls.

Now, of course, there are many other important provisions in the 34-page contract, including ones providing that Hydro-Quebec is responsible reimbursing NLH for operating costs, and for the costs of refurbishment of the Menihek plant and the installation of any new generating capacity at Menihek if that new capacity is required for future demand on the isolated Schefferville grid. (Menihek only uses a portion of the hydraulic power theoretically available at its site, leaving room for expansion.)

Refurbishment costs alone, over the 40-year life of the contract, have been estimated at $100-million.

The cost of purchasing Menihek power, plus the other charges which Hydro-Quebec will absorb through this arrangement, mean that the consumer price of electricity in the Schefferville system, as per Quebec regulatory approval of Hydro-Quebec's rates for the Schefferville-area customers, is expected to soon reach the staggering level of... seven cents a kilowatt-hour.

If you want “cheap” Labrador hydro power, sure, go ahead, build 14-cent Muskrat Falls. If you want really cheap Labrador hydro power... move to Schefferville.

So, yes, there are lots of fascinating details in the Menihek agreement, which was published by a provincial government regulatory body.

A Quebec provincial government regulatory body, that is.

The much-maligned Régie de l'énergie, in fact, which published the Menihek contract as part of an application file-numbered R-3602-2006.

And there, under the inconspicuous name of “B-1- HQD 1 doc 1” is the full and unfettered text of the Menihek agreement, in both French and English, with all of its fascinating provisions.

And that includes the most interesting provision of them all – and here's where you will recall an earlier observation about the choice of verb tenses in the totally apolitical press release issued on November 15, 2007.

It's the very first line of page 1, which says, in the English-language version, “THIS AGREEMENT made as of the 14 day of December 2005”.

The French-language version, helpfully, agrees with that date.

That's twenty-three months, almost to the day, before the date on the press release; which date in turn (and surely entirely coincidentally) was five weeks and two days after the 2007 provincial election in Newfoundland and Labrador.