Churchill Falls (Labrador) Corporation files motion with Québec Superior
Court

ST. JOHN'S, NL, Feb. 23 /CNW/ - Churchill Falls (Labrador) Corporation Limited (CFLCo) filed a motion in Québec Superior Court today commencing proceedings against Hydro-Québec to address inequities in the 1969 Upper Churchill Power Contract pricing.

"The motion details the basis of our claim to have the pricing terms of the 1969 Upper Churchill Power Contract amended for the remaining term of the Contract to 2041," said Ed Martin, President and CEO of CFLCo and Nalcor Energy. "We are asking the court to amend the Contract pricing terms to address the inequity which has resulted from unforeseen circumstances."

It is CFLCo's position that since the Power Contract was initiated, circumstances have changed in a way that could not have been reasonably foreseen at the time: energy prices have escalated significantly and access to export markets is now a possibility under open access regulations. This change in circumstances and the extraordinary length of the contract, which is 44 years plus an automatic renewal for an additional 25 years, has resulted in a gross inequity in the distribution of contractual benefits.

In the opinion of CFLCo, this unique situation, combined with the obligation under the Québec Civil Code to act in good faith throughout the term of a contract, obliges Hydro-Québec to renegotiate the terms of the contract to re-establish the equilibrium of benefits.

Presently, the purchase price under the Power Contract is one-quarter of one cent per kilowatt hour and the automatic renewal clause fixes the purchase price at one-fifth of one cent for the 25 year period beginning in 2016. This will mean, for the remainder of the Contract, power will be sold to Hydro-Québec for less than five per cent of its recent commercial value.

On November 30, 2009, CFLCo sent a letter to Hydro-Québec requesting they enter into negotiations to amend the pricing terms of the Power Contract to provide a fair and equitable price to CFLCo, consistent with the principle under the Québec Civil Code that parties are to act in good faith in the negotiation and throughout the term of contracts. Hydro-Québec did not respond to the request.

"We believe that considering the changing circumstances, Hydro-Québec's refusal to renegotiate further constitutes an abuse of rights," explained Martin, "and more generally, we believe that refusal is also in violation of the notion of "fair play" and the "spirit of justice", both of which have been found by the Supreme Court of Canada to form part of the notion of good faith."

The legal action has been taken in the Québec Superior Court as the Power Contract is governed by the laws of Québec.

Backgrounder - Case Summary

Churchill Falls (Labrador) Corporation (CFLCo) has begun legal action in Quebec seeking a change, on a go forward basis, of the pricing terms of the Power Contract between CFLCo and Hydro-Québec. Under this Contract, originally signed in 1969, energy generated from the Churchill Falls Generating Station in Labrador is sold to Hydro-Québec.

Since the Contract was initiated, circumstances have changed in a way that could not have been reasonably foreseen at the time.

    
    - The commercial value of energy has increased greatly. It was generally
      expected, with the advent of nuclear energy, the value would decline
      over time.
    - At the time the Contract was negotiated, CFLCo had no access to export
      markets because the government of Québec had refused permission to
      transmit energy across Québec territory. The result was that Hydro-
      Québec was the only possible purchaser.
    - Since 1997, the United States open access regulations require that
      companies such as Hydro-Québec who sell energy in the U.S. must give
      open access to their own transmission network at established tariff
      rates.
    

The Contract was signed for 44 years with an automatic renewal clause for another 25 years.

At the time of signing, the purchase price to be paid to CFLCo was roughly one third of Hydro-Québec's average resale price.

The change in circumstances since the original contract was signed and the extraordinary length of the contract has resulted in a gross inequity in the distribution of contractual benefits.

This unique situation, combined with the obligation under the Québec Civil Code to act in good faith throughout the term of a contract, CFLCo believes obliges Hydro-Québec to renegotiate the terms of the contract to re-establish the equilibrium of benefits.

On November 30, 2009, CFLCo called on Hydro-Québec to renegotiate a fair and equitable purchase price for the remaining term of the Contract to 2041. Hydro-Québec did not respond. As a result, CFLCo is commencing proceedings against Hydro-Québec to address disparities in the 1969 Upper Churchill Power Contract pricing.

The Power Contract is subject to the civil law of Québec and in Québec, as in many other civil law jurisdictions such as France, Belgium and Germany, it is a fundamental principle that contracts must be negotiated and executed in good faith. One aspect of good faith, which has been recognized by the Supreme Court of Canada, is that in certain circumstances, actions by one party, even if in strict accordance with the terms of a contract, may be found to be abusive and unjustified.

The Power Contract was signed over 40 years ago and under its present terms Hydro-Québec will receive virtually the entire benefit of the Contract for decades to come. Hydro-Québec is not willing to renegotiate the Power Contract to provide a fair and equitable purchase price reflecting the original intention of the parties.

CFLCo believes that this, in the context of the exceptional circumstances and changes which have taken place since that time, constitutes an abuse of rights. The failure to renegotiate the Power Contract is also in violation of the notion of "fair play" and the "spirit of justice" both of which have been found by the Supreme Court of Canada to form part of the notion of good faith.

When the Power Contract was signed, the price to be paid by Hydro-Québec represented approximately one-third of the average price Hydro-Québec charged its customers. Going forward, this action seeks a return to such a proportion for the percentage of CFLCo power sold domestically, and fair and equitable terms for the percentage of CFLCo energy sold in export markets, which would be 50 percent of Hydro- Québec's export market price.

For further information: Media Contact: Dawn Dalley, Manager, Corporate Communications, Nalcor Energy, [phone], c. [phone]