Hydro-Quebec Now Subject To Annual Energy Cap, But Not A Monthly Cap, Under Much-Disputed 1969 Power Contract: Churchill Falls (Labrador) Corp. v Hydro-Quebec, 2019 QCCA 1072

Introduction

Much ink has been spilled on the controversial 1969 power contract between Hydro-Quebec and CFLCo (the contract) and last week the Quebec Court of Appeal added to the pile with its decision in Churchill Falls (Labrador) Corp. v Hydro-Quebec, 2019 QCCA 1072. The contract at issue in the decision allowed Hydro-Quebec to purchase most of the power produced at the Upper Churchill hydroelectric facility at a very low fixed price, save for the Recapture block of 300 MW and the TwinCo block of 225 MW.¹ The recent decision of the Quebec Court of Appeal makes clear Hydro-Quebec is now subject to an annual energy cap and that some additional energy is available to CFLCo as of 2016, though not as much as they had argued for.

The precise inequity of the contract is unclear, but it has frequently been reported Hydro-Quebec garners 14 times the benefit of the Upper Churchill Hydroelectric facility than CFLCo does, with an estimated $28 Billion having flowed to Hydro-Quebec with just $2 billion having flowed to Newfoundland and Labrador.² The Supreme Court of Canada rejected multiple attempts on the part of CFLCo and the government of Newfoundland and Labrador to vary the terms or the effect of the contract over the years.³

In the June 20, 2019 decision released last week, the issues facing the Quebec Court of Appeal had a different flavour as compared to other disputes, as they concerned the interpretation of the contract as opposed to whether the contract's effects should be varied or whether Hydro-Quebec ought to be forced to renegotiate.⁴

This litigation began as Hydro-Quebec sought a declaration from the Superior Court of Quebec effectively protecting its rights of "operational flexibility" as defined under the contract and that the changes in the 2016 renewal did not have the effects CFLCo contended they did; those are, (1) by virtue of the Continuous Energy concept added in the 2016 renewal contract, Hydro-Quebec would be limited to specific capped quantities of electrical energy (monthly and yearly) equivalent to the Annual Energy Base under the contract and would not have the exclusive right to all energy and power from the Churchill Falls power plant; and (2) CFLCo would be entitled to sell power to third parties on an interruptible basis both before and after September 1, 2016.

The effect of these propositions are significant. If CFLCo were successful at trial, Hydro-Quebec would be limited to its annual entitlements of energy under the contract in 12 monthly blocks instead of whenever it required it. This would mean, as compared to the 1969-2016 arrangement, the 2016-2041 arrangement would see Hydro-Quebec with a surplus of energy available in summer months of low demand and a shortfall of energy in the winter months of high demand. Coupled with CFLCo's apparent right to sell surplus energy to third parties, the effect of these propositions would mean a significant bundle of value transferred to CFLCo from Hydro-Quebec by virtue of the differences between the original and renewal contracts.

After a 31 day trial, the trial judge decided in favour of Hydro-Quebec, rejecting those propositions CFLCo had brought forward.

The Quebec Court of Appeal overturned parts of that decision, leaving CFLCo partially successful in the result. The Quebec Court of Appeal agreed with CFLCo in finding the contract is really two contracts with two specific terms, the original contract with a term spanning from 1969 to 2016 and the renewal contract with different language starting at Schedule III of the document, with a term spanning from 2016 to 2041. The Court of Appeal concluded Hydro-Quebec has the right to purchase and receive, annually, a specific quantity of energy equivalent to the value of the Annual Energy Base as defined in the contract, which is then allocated monthly pursuant to the concept of Continuous Energy, according to a mathematical formula that provides for the calculation of the monthly payments owed by Hydro-Quebec. However, Hydro-Quebec's rights under the Operational Flexibility provisions of the contract allows it to schedule and plan its energy from one month to another, the whole without being limited to a quantitative cap established pursuant to the concept of Continuous Energy on a monthly basis. Thus, there effectively is an annual cap on Hydro-Quebec's entitlement to energy, but not a monthly cap.

The remainder of this article will summarize the Quebec Court of Appeal decision and analyze its effects.

THE DECISION

The issues

The Quebec Court of Appeal answered three central questions on appeal, the first two of which are the focus of this article:

Did the trial judge err by concluding that, under the terms and conditions of Schedule III of the contract (the renewal contract), HQ still has the exclusive right to purchase, and to receive, all the available power and all the energy produced at the Churchill Falls plant, with the exception of the power and energy associated with the Twinco and Recapture blocks, without being limited, on a monthly basis, to a quantitative cap established on the basis of the concept of Continuous Energy? The Court of Appeal concluded Hydro-Quebec has the right to purchase and receive, annually, a specific quantity of energy equivalent to the value of the Annual Energy Base as defined in the contract, which is then allocated monthly pursuant to the concept of Continuous Energy, according to a mathematical formula that provides for the calculation of the monthly payments owed by...