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November 19, 1996
(Executive Council)


Following are speaking notes from an address by Brian Tobin, Premier of Newfoundland and Labrador on Churchill Falls today in Toronto at the Empire Club:

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) Hydro-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. The vice president of CF(L)Co Eric Lambert 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.

By 1969, CF(L)Co had spent $150 million ... but had no power contract. 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.

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.

In Ontario, you pay even more: domestic consumers pay 88 mills or almost 9 cents per kilowatt hour; industrial consumers pay 50 mills or 5 cents per kilowatt hour.

Today, Hydro Quebec pays only about 1/4 of a cent for a kilowatt hour and then resells it 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 export from Ontario ... Chrysler Mini Vans made in Windsor. That's like exporting Mini Vans to the US for $1,200 each, compared to the current price of $21,000 each. After 2016, it will be like exporting Mini Vans for $860 each.

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 1.0 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.

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 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. 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.

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. Ask the public sector unions in that province.

Twelve years ago, Hydro-Quebec recognized the need to re-negotiate the price paid for Churchill Falls power. In 1984, Hydro Quebec and Newfoundland and Labrador Hydro signed a "Statement of Intent Regarding Churchill Falls Negotiations" to re-negotiate the Churchill Falls agreement.

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.

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.

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?

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.

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.

1996 11 19 3:10 p.m.

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