Following are notes for an address by Brian Tobin, Premier of Newfoundland and Labrador, on Churchill Falls delivered today to the Vancouver Board of Trade:

On October 15, I spoke in Montreal about Churchill Falls. I did so not to confront. I did so to inform. And, I did so to make an appeal for fairness and equity.

I am here today to explain, as I did in Montreal, why the Churchill Falls agreement must be re-negotiated. This is an issue that should concern all Canadians.

From the outset, there are three things we should all realize about the Churchill Falls agreement:

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

(2) Quebec has reaped unconscionable windfall profits; and

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

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

Let me explain how it was that 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, Quebec in the 1960s said `no' to the free movement of electrical power.

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. We had no choice but to accept Hydro Quebec as the middleman.

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 ... CF(L)Co ... in 1966.

Based on the 1966 letter of intent ... and Hydro Quebec's demand for first delivery of power in four years ... CF(L)Co began construction at Churchill Falls in 1967. To quote Brinco: The Story of Churchill Falls, by Phillip Smith:

• "By the time the power contract was signed [in 1969], $150 million had already been spent on the project and contracts committing [CF(L)Co] to a further $240 million in expenditures had been awarded to contractors and manufacturers. These are incredible sums, considering that the whole venture could have collapsed right up until the moment all those signatures were placed on all those documents [in 1969]."

The Vice President of CF(L)Co Eric Lambert had said in 1967 that if the deal with Hydro Quebec fell through, it would "bankrupt Churchill Falls and imperil Brinco" (CF(L)Co's parent company). Hydro-Quebec knew this and exploited it.

Hydro Quebec demanded ... and got ... agreement for a 40-year agreement, with a 25-year renewal. On top of this, the price for power goes down by almost 50 per cent over the 65 years.

As former Quebec Minister Eric Kierans said to Peter Gzowski on September 24: "The [agreement] had gone from 30 to 65 years. I couldn't believe it... [P]eople don't take risks more than 20 or 30 years even on long term things ... That's how insane this thing was." I agree. The 65 year agreement is "insane".

CF(L)Co was ready to sign anything to avoid financial ruin. Hydro 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 gave various guarantees, for example that the project would be completed. It purchased $100 million in bonds. And, it invested $15 million in equity.

For these, Hydro Quebec bargained to 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.

For example, in 1974, the National Energy Board increased the export price of natural gas to competitive levels. This involved over-riding prices in long-term contracts. This was not done for electricity.

And, worldwide, 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, it was like Saskatchewan reaping virtually all of the profits from the oil that went East from Alberta. 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.

Let's 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 up to 6 cents. That's like buying oil at $1.65 a barrel and re-selling it at the world price of over $30 (Canadian) a barrel. Put another way, this equates to 1 cent per litre of gasoline or 4 cents per gallon.

After 2016, the price paid by Hydro-Quebec drops to the equivalent of $1.22 a barrel for oil or 0.7 cents per litre ... that is, 3 cents a gallon ... for gasoline.

Let's compare that to an important BC product - Fraser River Sockeye. That's like exporting Fraser River Sockeye to Japan for 23 cents a pound, compared to the current market price of $3.80 a pound. After 2016, it will be like exporting Fraser River Sockeye at 17 cents a pound.

Let's compare it to another important BC product - Douglas Fir plywood. It is like exporting Douglas Fir plywood to the US for $1.00 a sheet, compared to the market price of $17. After 2016, it will be like exporting Douglas Fir plywood to the US for $0.70 a sheet.

It is not only the low price paid by Hydro-Quebec for Churchill Falls power ... it is also the massive quantity of power.

Since 1976, Churchill Falls has exported the equivalent of 1 billion barrels of oil. That is equivalent to all the oil from both Hibernia and Terra Nova projects off Canada's East Coast. Over the 65 year term of the agreement, the export of energy from Churchill Falls will equal 3.3 billion barrels of oil or more than three Hibernias and three Terra Novas combined.

Hydro Quebec is buying Churchill Falls power at 1969 prices and re- selling it at 1996 prices. Under the agreement, this will go on for another 45 years. The windfall profits for Hydro Quebec 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 per cent of the benefits, while Newfoundland and Labrador got only 4 per cent. 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 per cent, while Hydro Quebec's will increase to 98 per cent.

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 keep going up to operate and maintain the 40 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 agreement.

Because of this, by 2001, CF(L)Co 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) CF(L)Co 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 CF(L)Co ... 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 CF(L)Co shares in return. If Hydro Quebec makes enough cash contributions, then it would gain a majority of CF(L)Co 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 CF(L)Co . But, beginning in 2002, CF(L)Co 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 CF(L)Co 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 cannot accept a situation where the future holds a $340 million cash shortfall for CF(L)Co and a $56 billion gain for Hydro Quebec.

The Churchill Falls agreement 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 don't add up. The project simply will not be able to pay its way. And, so the agreement 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 make the case for re-negotiation of the Churchill Falls agreement 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. In Montreal, I released a document signed 12 years ago by the General Secretary of Hydro Quebec that does this. This document had never before been released.

The document is entitled, "Statement of Intent Regarding Churchill Falls Negotiations". It is a signed statement of intent to re-negotiate the Churchill Falls agreement. There is a covering letter from the General Secretary of Hydro Quebec to the Chairman of Newfoundland and Labrador Hydro.

As its starting point the "Statement of Intent" recognized the need, 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 went on to state:

• "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."

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 the negotiation was aborted. But the document shows clearly that Hydro Quebec ... with the knowledge of the Levesque government ... recognized that this is an agreement 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 General Secretary of Hydro Quebec, is a "fair and equitable return" that takes into account "the new realities".

Those words stand in stark contrast to recent statements made by Hydro Quebec to justify the 1969 agreement.

Hydro Quebec has said it made no "extraordinary profits on Churchill Falls" ... and CF(L)Co receives a fair rate of return. In an October 15 position paper, Hydro-Quebec stated that CF(L)Co made on average $33 million a year since 1977, an 11 per cent return on equity.

This ignores two critical factors. First, CF(L)Co will soon begin to suffer cash shortfalls that could eventually total $340 million.

Second, while Hydro-Quebec invested $15 million in shares, bought $100 million in bonds and gave various guarantees, since 1977 it has received net benefits estimated at $12 billion and will receive as much as $56 billion more before the end of the contract.

What is Hydro Quebec's return on its $15 million equity investment? In 1977, the benefits to Hydro Quebec were $124 million. That is an 827 per cent rate of return. In 1996, the benefits to Hydro Quebec are $745 million; that is almost a 5,000 per cent rate of return.

In 2016, when the price paid by Hydro Quebec for Churchill Falls power will drop dramatically, its benefits will increase to about $1.13 billion and its rate of return will be about 7,500 per cent. By the end of the agreement in 2041, the benefits to Hydro Quebec will exceed $1.7 billion and its rate of return will exceed 11,000 per cent.

This is not the profit that Hydro-Quebec bargained for. It is an immense and unconscionable windfall. And, it stands in marked contrast to the 11 per cent rate of return ... soon to disappear ... that Hydro Quebec says is fair for CF(L)Co.

The position paper also stated "if Hydro-Quebec had not done the Churchill Falls deal, we would have brought forward the development of one of our own facilities in Quebec."

Opportunities for development in Quebec were not lost to Hydro-Quebec because of its participation in Churchill Falls. Those opportunities were held in reserve for development in the mid-1970s.

Joseph Bourbeau, former Chair of Hydro Quebec, said:

• "The output of Churchill Falls obliged us to postpone commissioning Manic 3 until 1976 and Outardes 2 until 1978. So these projects had to be completed in a period of high inflation. That increased their cost considerably."

Robert Boyd, former President of Hydro Quebec, said that the delay in Manic 3 was four years and that for Outardes 2 was six years. These delays were Quebec's supposed 'loss' from the Churchill Falls agreement.

In fact, by participating in Churchill Falls, Hydro Quebec lost nothing in Quebec; instead, it gained something extraordinary in Labrador.

Churchill Falls is one of the best sites in the world for hydro development. Early engineering reports describe ... "the exceptional characteristics of the project" ... a vast watershed ... 35,000 square kilometres ... larger than Vancouver Island. And the vertical drop at the power house is 300 metres ... six times the height of Niagara Falls. Churchill Falls was the "deal of the century", to quote former Hydro Quebec President Robert Boyd.

On October 23, Quebec's Natural Resources Minister Guy Chevrette tabled legislation for reciprocal wheeling of electricity. This is a positive development, made in response to planned deregulation in the United States.

It does nothing, however, to resolve the serious problems with the Churchill Falls agreement. Instead, it reminds us that Quebec categorically refused to wheel Churchill Falls power. This reinforces the need to renegotiate the Churchill Falls agreement in light of changed circumstances.

Why am I bringing up the Churchill Falls agreement 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 per cent

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.

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 CF(L)Co's head above water will not do this. It would not solve the basic inequity that is at the heart of the agreement.

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 Quebec and Newfoundland and Labrador can find a solution. We can find a solution that is fair to both our provinces.