An Unexpected Turn… or maybe not

Adecision handed down by an international “arbitration panel” in late April of this year which upholds Hydro-Quebec’s (HQ) position in a multi-billion dollar contract dispute with a group of Vermont electricity companies could bode poorly for several Canadian insurers who are currently engaged in legal actions against Quebec’s power utility provider to recover losses that arose from the infamous January 1998 ice storm.

As reported in the February 2001 issue of CU, eight insurance companies filed legal actions against HQ for the recovery of approximately a quarter of a billion dollars in claim losses incurred as a result of power outages arising from the January ice storm that crippled large parts of Quebec for up to two months. Although filed individually, the insurer actions were all made at the beginning of this year just prior to a provincial legal cut-off deadline. All of the actions allege, in summary, that HQ had failed to maintain the quality of its power grid and, but for “gross negligence” on the part of the utility provider’s management, the extent and length of the power outages experienced within the province could have been minimized.

What does this have to do with the recent dispute settlement between HQ and the Vermont electricity companies? Perhaps nothing, and then perhaps everything. The Vermont companies in question – which collectively operate as a group known as the Vermont Joint Owners (VJO) – entered into a fixed-price contract with HQ in 1990 whereby the Quebec utility provider would provide a set volume of electricity for 30 years for a total value of US$4 billion. During the course of the 1990s, electricity and energy prices plummeted, leaving the VJO members paying significantly higher than market rates to HQ. The VJO attempted on several occasions through political and legal channels (which up until the most recent dispute settlement had cost the group of companies approximately US$15 million in legal expenses) to have its contract with HQ terminated – with no success.

Then came the January 1998 ice storm, and HQ was unable to deliver its end of the bargain due to multiple pylon/line collapses. The VJO used this opportunity to take legal action against HQ for recovery of expenses it incurred during a 66-day loss of service period, plus termination of the contract. The VJO’s case, prior to going to arbitration, was built on the premise that HQ had failed to adequately maintain its power grid infrastructure – and to a large extent this argument depended on the expert testimony of Brian White, a consulting engineer with extensive experience on pylon/line structures used within Quebec. HQ maintained, however, that the failure of its infrastructure was due to an “Act of God” and therefore it could not be held responsible for the losses that arose from the ice storm. The final decision handed down by the international arbitration panel dismissed the VJO’s argument for having the contract terminated, but did uphold the recovery for loss of service for the 66-days mentioned above – HQ will have to pay the companies in question a total of US$20 million. Needless to say, HQ claimed the outcome of the arbitration panel to be a “complete victory”. Jean Bertrand of HQ stated the following in a National Post article: “The decision [of the arbitration panel] dismisses all the contentions of the Vermont Joint Owners.”

As both the JVO and insurer legal actions mentioned above hinge on the same argument, and much of the same evidence that came out of the legal proceedings of the Vermont companies against HQ, it stands to reason that the courts will give sufficient weight to the investigation of the arbitration panel, and of course, its final decision. But, it is significant to note that the VJO dispute was settled out of court, and therefore the evidence against HQ had not been “legally tested”. Furthermore, as the insurers are filing for recovery of losses and had not entered into any form of contract or relationship with HQ, then it should be fair to assume that the arguments being made are significantly different to that of the VJO.

Another ironic twist to the VJO/HQ saga, an insurance industry source notes, is that the surge in energy/electricity prices over the past year has actually left the Vermont utility companies in a favorable position with the fixed-prices set out in the 1990 contract with HQ. The VJO is said to be now selling HQ supplied electricity to other U.S. power service providers at a profit. “Let’s just say that, faced with higher market prices for electricity and the uncertainty that has swept across the U.S. due to the energy price crises, that the VJO’s enthusiasm for voiding the contract with HQ evaporated,” the source comments.