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October 15, 1996
(Executive Council)

 

The following is an address by Premier Brian Tobin, delivered today to the Montreal Rotary Club:

"The art of government at the end of this century is the art of reconciling contraries." Those are the words of the late Robert Bourassa. He practised the art of government with great skill for more than two decades.

Today, it is not my task to reconcile two contraries. Rather, it is to explain a common problem. That problem is the Churchill Falls agreement.

I am not here today in Montreal to confront. I am here to increase understanding. I am not here to argue the law. I am here to speak about justice. More than anything else, I am here to challenge us to work together.

I must begin with some hard truths. There are three things we should all realize about the Churchill Falls agreement:

(1) It was arrived at in an unfair way;

(2) Under it, Quebec has reaped unconscionable windfall profits; and

(3) The Churchill Falls project is not viable under the current contract.

For all these reasons, the contract must be re-negotiated. It is not a question of whether. It is a question of how and when.

The Churchill Falls agreement was arrived at in an unfair way. Geography made that possible. To get Churchill Falls power to market, it had to cross Quebec. But, Hydro Quebec in the 1960s said 'no' to the free movement of power.

Hydro Quebec said, you can sell the power to no one but us. You cannot 'wheel' Churchill Falls power through the Hydro Quebec power grid. And, you cannot build a power line to reach markets in the US.

Once this was clear, Hydro Quebec could ... and did ... dictate the terms of the Churchill Falls agreement. A letter of intent was signed between Hydro Quebec and the developer, Churchill Falls (Labrador) Corporation ... CFLCO ... in 1966.

Based on the 1966 letter of intent ... and Hydro Quebec's demand for first delivery of power in four years ... CFLCO began construction at Churchill Falls in 1967. By 1969, CFLCO had spent $150 million ... $668 million in today's dollars ... but had no contract with Hydro Quebec.

CFLCO faced financial ruin without a power contract. At that point, Hydro Quebec realized its immense bargaining power. It used that power mercilessly.

As Eric Kierans .. a Minister in Jean Lesage's Cabinet ... recently said, a contract for 20 years would have been adequate to secure the risk and investment that Hydro Quebec was making. Such a contract would now be coming to an end.

But, Hydro Quebec demanded, and ... according to Eric Kierans, to their astonishment ... got, agreement for a 40 year contract, with a 25 year renewal. On top of this, the price for power went down throughout the 65 years.

CFLCO was ready to sign anything to avoid financial ruin. Quebec knew this and exploited it. The Churchill Falls agreement was arrived at in an unfair way.

In 1969, the Churchill Falls agreement was a good business deal for Hydro Quebec. It took risks. It made investments. For these, Hydro Quebec would receive a handsome profit ... if the price of power and the cost of operating the project had remained stable. But, they did not.

By 1973, the first oil crisis had caused the price of energy ... including electricity... to skyrocket. New regulatory arrangements for petroleum were put in place by the Canadian government ... but not for electricity.

World-wide, contracts for petroleum and for many other energy sources were re-negotiated to fit radically changed circumstances. But, there was no such re-negotiation of the Churchill Falls agreement.

Instead, Hydro Quebec began to reap massive windfall profits ... profits far beyond those contemplated when the agreement was entered in 1969.

Let's see how much Hydro Quebec pays for Churchill Falls power. In 1976, it paid 3 mills, or 3 tenths of a cent, per kilowatt hour. Today, it pays 2.7 mills, or just over one quarter of a cent. By 2016, the price will drop to 2 mills, or one fifth of a cent.

Letūs compare that with how much Hydro Quebec gets when it sells power. Today, domestic consumers pay almost 60 mills, or 6 cents per kilowatt hour. Industrial consumers pay 35 mills, or 3.5 cents.

Today, Hydro Quebec pays only about 1/4 of a cent for something it resells for 5 to 6 cents. Thatūs like buying oil at $1.65 a barrel and re-selling it at the world price, which is over $20.00 a barrel. Put another way, this equates to 1 cent per litre of gasoline or 4 cents per gallon.

After 2016, this drops to $1.22 a barrel for oil or 0.7 cents per litre ... that is, 3 cents a gallon ... for gasoline.

And, the energy from Churchill Falls is equal to a great deal of oil. Since 1976, Churchill Falls has exported the equivalent of 1.0 billion barrels of oil. That's equivalent to the massive Hibernia and Terra Nova oil fields combined.

Over the 65 year term of the agreement, the export of energy from Churchill Falls will equal 3.3 billion barrels of oil. This is more than 3 Hibernias and 3 Terra Novas combined.

Hydro Quebec is buying Churchill Falls power at 1969 prices and re- selling it at 1996 prices. The windfall profits are immense ... and unconscionable.

The Economic Council of Canada published a study entitled "Blue Gold: Hydro-Electric Rent in Canada." The study estimated that Quebec received benefits of $583 million in 1979 from Churchill Falls power.

In 1996, the Dominion Bond Rating Service published a report entitled, "The Public Electric Utilities in Canada." It estimated that Hydro Quebec received benefits of $536 million in 1994 from Churchill Falls power. Both these studies take into account Hydro Quebec's transmission and other costs.

Since full power came on stream from Churchill Falls in 1976, Hydro Quebec has received benefits averaging about $600 million a year. Newfoundland and Labrador has received benefits that averaged $23 million a year. Recently, that has slipped to $16 million a year.

From 1976 to 1996, Hydro Quebec received 96% of the benefits, while Newfoundland and Labrador got only 4%. To put this in perspective, in 1995, while Hydro Quebec received benefits of $1.4 million a day from Churchill Falls, Newfoundland and Labrador received just $45,000 a day.

This will become even more lop-sided in the next 20 years. From 1996 to 2016, Newfoundland and Labrador's share of the benefits will shrink to 2%, while Hydro Quebecūs will increase to 98%.

This is a significant and fundamental injustice. It should be a matter of concern to all fair-minded Quebecers and, indeed, all Canadians.

The Churchill Falls agreement must be re-negotiated because it has yielded unconscionably large benefits for Quebec and unconscionably small benefits for Newfoundland and Labrador. For the people of Newfoundland and Labrador ... the resource owners ... the situation will become far, far worse.

Costs have gone up to operate and maintain the 64 kilometres of dykes, the massive power house with its 11 turbines, the huge transformers, and the 200 kilometre power line to the Quebec border. Costs have gone up because of inflation ... something else not taken into account in the 1969 contract.

Because of this, by 2001, CFLCO will run out of money. Cash shortfalls will follow in various years thereafter. When that occurs, there will be three options to make up the shortfalls:

(1) CFLCO can borrow the money;

(2) Newfoundland and Labrador can make cash gifts; or

(3) Hydro Quebec can make cash contributions.

Newfoundland and Labrador can make cash gifts to CFLCO ... for which it would receive nothing ... or Hydro Quebec could make the cash contributions.

The twist is this: if Hydro Quebec makes cash contributions, then it gets CFLCO shares in return. If Hydro Quebec makes enough cash contributions, then it would gain a majority of CFLCO shares and take control of the Churchill Falls project.

In addition, the benefits to Newfoundland and Labrador will continue to shrink. That is because the major benefits to Newfoundland and Labrador are dividends from CFLCO . But, beginning in 2002, CFLCO will have to forego the payment of dividends in some years and pay reduced dividends in most others.

The benefits that Newfoundland and Labrador now receive find their way into the province's revenues. When those revenues are greatly reduced ... as they will be early in the next century ... then the province will be forced to raise taxes or cut spending for things like hospitals and schools. Meanwhile, Hydro Quebec would continue to reap immense windfall profits.

But even this lamentable situation will worsen. In 2016, the price paid for Churchill Falls power will go down again, from one quarter of a cent per kilowatt hour to a fifth of a cent. Massive cash shortfalls will follow. For the remaining 25 year term of the contract, these would total more than $340 million.

To keep CFLCO from financial collapse, Newfoundland and Labrador would be forced to close more hospital beds, close more schools, abandon more public services, all so that we could subsidize the production of power from Churchill Falls.

Meanwhile, Hydro Quebec would be reaping even more billions of dollars in windfall gains. We can not do this. We will not do this.

We cannot accept this situation where for the remainder of the contract for future holds a $340 million dollar cash shortfall for CF(L)Co and a $56 billion gain for Hydro Quebec.

The Churchill Falls contract must be re-negotiated because it is simply not viable. Declining prices for power over 65 years, and increasing costs for operating the project for that period just donūt add up. The project simply will not be able to pay its way. And so the contract must be re-negotiated.

But, Hydro Quebec says "a contract is a contract" and that is that. Well, it isn't. Contracts are re-negotiated all of the time when a fundamental change of circumstances calls for it.

The circumstances of the Churchill Falls contract make the case for its re-negotiation utterly compelling.

And Hydro Quebec has recognized this. Twelve years ago, it recognized the need to re-negotiate the price paid for Churchill Falls power.

I have here today a document signed 12 years ago by Mr. Jean Bernier the Secretary General of Hydro Quebec that does this. This document has never before been released.

Today I am going to release this document, even though it includes a secrecy clause. Those who signed this agreement did not break its secrecy ... but I will. Its contents are too important to be hidden any longer.

The document was signed by both Hydro Quebec and Newfoundland and Labrador Hydro in 1984. The document was turned up when I ordered a complete review of the files on Churchill Falls.

A few weeks ago, in Jasper, Alberta, I gave a copy of this document to Premier Bouchard. He was not aware of it. However, as I pointed out to Premier Bouchard, the record of negotiations leading up to this document shows that former Premier Levesque approved this initiative.

Today, it is time that we all knew the contents of this document. It is entitled, "Statement of Intent Regarding Churchill Falls Negotiations." There is a covering letter, written by Jean Bernier, then General Secretary of Hydro Quebec. The letter is dated February 1, 1984. The letter was sent to the Chairman of Newfoundland and Labrador Hydro.

The document is a signed statement of intent to re-negotiate the Churchill Falls agreement ū signed by both Hydro Quebec and Newfoundland and Labrador Hydro.

As its starting point the "Statement of Intent" recognized the need for, as is stated in Article 1, the preamble, for:

"a fair and equitable return to Newfoundland as the owner of the Churchill Falls resource".

The document - sent by Hydro Quebec to Newfoundland and Labrador Hydro - went on to state in Article 2:

"Bearing in mind the need to reach a compromise approach to a more equitable return to Newfoundland as the owner of the hydraulic resources of the Upper Churchill, the parties agree to devise a formula whereby Newfoundland would receive a fair and equitable return for the electricity produced, taking into account the need to adapt the terms of existing arrangements to the new reality which has arisen since the original arrangements were entered into."

Article 2 also stated:

"The parties agree that there exists a basis for recapture of a significant block of power and energy from the existing Churchill Falls plant for use in Newfoundland and Labrador"

The rest of the document goes on to set out a framework for that re-negotiation.

What happened to this statement of intent? It became buried and forgotten, as it was not acted on. But the document shows clearly that Hydro Quebec ... with the knowledge of the Levesque government ... recognized that this is a contract that needs to be re-negotiated.

The statements by Hydro Quebec ring as true today as they did 12 years ago. Today, what we need, in the words of the Secretary General of Hydro Quebec, is a "fair and equitable return" that takes into account "the new realities".

Why am I bringing up the Churchill Falls contract now? The answer is straight-forward. Because it is the right thing to do. Justice and equity have been too long denied to the people of Newfoundland and Labrador. Tens of thousands remain out of work because of the collapse of cod stocks. Unemployment ... officially ... is 19%.

We have the lowest expenditure per capita in Canada for health care and education ... yet we must cut these services again and again as provincial revenues fall. Our population is going down as people leave the province.

Faced with this and the monumental injustice of the Churchill Falls agreement, what would you do if you were in my position? How far would you go to get a fair share of the benefits from Churchill Falls for the people of Newfoundland and Labrador, for the owners of the resource?

The fundamental inequity of the Churchill Falls agreement remains. It is worsening. It will not go away unless we turn our minds and our consciences to solving it.

I am convinced that the people of Quebec, when they understand the circumstances of the Churchill Falls agreement, will find it just as unacceptable as do the people of Newfoundland and Labrador.

Working together in good faith we can find a solution. We can find a solution that is fair to Quebec and that is fair to Newfoundland and Labrador.

Re-negotiation of the Churchill Falls agreement, to re-balance the sharing of benefits in a fundamental way ... not a minor way ... is what is needed. Just keeping CFLCO's head above water will not do this. I expect Hydro Quebec might well be willing to do that. But, it would not solve the basic inequity that is at the heart of the agreement.

Re-negotiation of the Churchill Falls agreement is the key, as well, to unlocking the further riches of the Churchill River. Downstream from Churchill Falls there are two sites ... Gull Island and Muskrat Falls ... with immense hydro potential.

Together, these sites can produce 3,100 megawatts of power. This is a major source of electricity, though not as great as the 5,400 megawatts at Churchill Falls. These sites can produce what is probably the lowest cost hydro power as yet undeveloped in North America.

If we can overcome the problem of the Churchill Falls agreement, then we can forge a partnership to develop these additional rich resources. Development of Gull Island and Muskrat Falls will cost $10 billion. This would boost the economies of both our provinces at a time when it is most needed.

Premier Bouchard has said his priority is to create jobs and generate economic growth. I agree.

Gull Island would create 1,200 person years of work in engineering, design and site management. It would create 6,000 persons years of work in construction.

Muskrat Falls would create 900 person years of work in engineering, design and site management. It would create 3,800 person years of work in construction.

That's 12,000 person years of work in highly paid engineering and construction jobs.

Working together, we can combine the expertise and experience of both Hydro Quebec and Newfoundland and Labrador Hydro. We can bring together the vast array of companies and suppliers needed to build these huge projects.

The benefits to Newfoundland and Labrador would also include a secure and stable source of power to Labrador and to the island portion of the province. And, because we need only a small portion of this power, most will need to be marketed, again via Quebec. Both provinces can share ... in a fair and equitable way ... the benefits from these rich resources.

That is the choice that we face. We can work together to share in an equitable way the benefits of Churchill Falls and new developments at Gull Island and Muskrat Falls. Or, we can remain locked in the rigidities of the current Churchill Falls agreement, drifting towards its financial collapse ... and some harsh consequences as we approach that collapse.

At the outset, I said that my purpose was not to reconcile two contraries. Rather, it has been to explain a common problem, the Churchill Falls agreement. By resolving that problem we can not only lift the burden of an inequitable and, eventually, un-viable agreement.

We will also open up new opportunities. We will benefit the people of both our provinces. Surely, that is the better path. I believe that is the path that Quebecers should and will choose.

NOTE TO EDITORS: The premier's address is also available in
French by contacting Communications and
Consultation Branch at (709) 729-3610. The
address is also posted on the government's
Internet site at www.gov.nl.ca

1996 10 15   5:30 p.m.

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