March 9,1998
(Executive Council)

Newfoundland and Labrador Hydro to negotiate Churchill River Developments

Premier Brian Tobin today directed Newfoundland and Labrador Hydro to begin formal negotiations with Hydro-Quebec to work out detailed agreements for the development of 3,200 megawatts of additional power from the Churchill River system.

"This is a great day for Newfoundlanders and Labradorians," said Premier Tobin. "These developments will add tremendous benefits to the existing Upper Churchill facilities in our province. As of today, Quebec has waived the three year recall notice on 130 megawatts of power. This will generate new revenues for the province in excess of $20 million annually. We will receive one billion dollars over the life of the project from the Guaranteed Winter Availability Contract. And we will own 65.8 per cent of the expansion at Churchill Falls, and therefore receive two-thirds of the profits from the new facilities to be constructed there."

These arrangements include the expansion of the existing Churchill Falls project through the partial diversion of two Quebec rivers, the Saint-Jean and the Romaine, into the Smallwood Reservoir. A new generating station containing two 500-megawatt turbines will be built to increase the existing capacity at Churchill Falls by 1,000 megawatts.

"Nothing in these agreements affects the rights of taxation or any other benefits which come due to Newfoundland and Labrador in 2016," noted Premier Tobin.

The utilities will also negotiate the details of the Gull Island development on the Lower Churchill. A 2,200 megawatt generating station, containing eight 283-megawatt generators, will be constructed. Two 735 kV transmission lines, one from Gull Island to Churchill Falls, and a second from Gull Island to Quebec, will also be built and the cost rolled-in to the Quebec grid.

"This is a good deal for the province," said William Wells, President and CEO of Newfoundland and Labrador Hydro. "There is a floor price guarantee, but no ceiling, so Newfoundland and Labrador will benefit from any windfalls accruing to the project. There will be a guaranteed outlet for all of the available power and energy as a result of the `take or pay provisions in the Power Purchase Agreement with Hydro Quebec Energy Services. The components of this framework are vital to preserving the financial viability of CF(L) Co., and will allow it to become a major contributor to the economic development of the province."

Newfoundland and Labrador Hydro and Hydro Quebec will also spend up to $20 million to study the feasibility of development at the Muskrat Falls site.

Another key component of this development for the province is the proposed construction of a $2.2 billion transmission line from Gull Island in Labrador to Soldiers Pond, near Holyrood, on the Island. This will consist of an 800-megawatt HVDC infeed which will use submarine cables to cross the Strait of Belle Isle.

"We have joined with the federal government to undertake technical and economic feasibility studies on the proposed infeed," said Premier Tobin. "This line will provide the Island with a stable source of power and energy to address future residential and commercial needs."

Once construction begins, these proposed developments will take about six years to complete. At peak construction in 2004, an estimated 6,200 jobs will be created. The developments will involve investments of approximately $12 billion, including the infeed to the Island. The developments will be subject to applicable environmental assessment processes, and will proceed in a manner which is sensitive to the legitimate concerns and interests of local and Aboriginal communities.

A Memorandum of Understanding is expected by the end of 1998.

Contact:

Heidi Bonnell, Office of the Premier, (709) 729-3564

Don Barrett, Newfoundland and Labrador Hydro, (709) 737-1370

Tara Laing, Department of Mines and Energy, (709) 729-4890

 

Fact Sheet

Benefits to Newfoundland and Labrador

Applicable to all of these developments

The laws of Newfoundland and Labrador will apply to entities created to develop all of the below projects.

Gull Island Development - 2,200 MW capacity

65.8 per cent ownership, (ownership split same as CF(L) Co.) in a limited partnership under the laws of Newfoundland and Labrador.

1,000 MW of clean, hydro-electric power to address current and future power and energy needs of consumers in Newfoundland and Labrador. Providing a secure, renewable source of power, available to both residential and industrial customers at stable rates.

The province receives 100 per cent of the benefit from any greenhouse gas emission credits.

The project will have the full benefit of higher market prices, with the additional protection of a floor price guarantee from Hydro Quebec in the event of lower market prices. The floor price enables financing for the project to be secured.

A progressive royalty regime for the province of Newfoundland and Labrador, similar to the Generic Offshore Royalty Regime, to be implemented. Royalty payments increase as project profitability increases.

With the combination of a 65.8 per cent ownership interest in this project, and a maximum royalty rate of 50 per cent, the province would receive up to 83 per cent of marginal revenues.

Newfoundland and Labrador Hydro will be reimbursed for previous development expenses, subject to lenders' approval.

Churchill Falls expansion - 1000 MW new capacity

65.8 per cent ownership for Newfoundland and Labrador, through CF(L) Co.

Benefits from any greenhouse gas emission credits shared 50/50 with Quebec, in recognition of Quebec river diversions.

The project will have the full benefit of higher market prices, with the additional protection of a floor price guarantee from Hydro Quebec in the event of lower market prices. The floor price enables financing for the project to be secured.

None of the arrangements will affect in any way options available to the province in 2016.

Transmission ines (Quebec-Labrador) - 2 X 735 kV lines

Construction of one 735 kV transmission line from Gull Island to Quebec, and one 735 kV line from Gull Island to Churchill Falls.

The $3 billion cost for the lines (both in Labrador and Quebec) will be rolled-into the Quebec Grid. This is critical to the viability of the project for Newfoundland and Labrador.

Transmission costs will be borne upfront by Hydro-Quebec, which will recover its investment over a 30 year period.

Newfoundland and Labrador Hydro and Hydro-Quebec, in a limited partnership, will have 50/50 ownership of transmission lines in Labrador.

The Memorandum of Understanding will contain a "shotgun" provision. This provision will allow Newfoundland and Labrador Hydro the option to acquire 100 per cent ownership of the transmission assets in Labrador at net book value after the debt repayment period has ended.

 

Muskrat Falls (possible future development) - 800 MW capacity

65.8 per cent ownership, in a limited partnership under the laws of Newfoundland and Labrador, to determine the feasibility of joint development of Muskrat Falls power for export.

Newfoundland and Labrador Hydro and Hydro-Quebec will jointly spend up to $20 million to confirm feasibility of the project. At that point a decision on proceeding will be made.

If developed, 100 per cent of the benefits from any greenhouse gas emission credits accrue to Newfoundland and Labrador.

Royalty regime same as Gull Island.

 

Transmission Line from Labrador to the Island of Newfoundland

Construction of one "400 kV HVDC transmission line from Gull Island in Labrador to Soldiers Pond, near Holyrood on the Island.

Line will have a capacity of 800 megawatts and is estimated to cost $2.2 billion.

 

Other Benefits

RECALL

The three year required notice for recall of 130 MW of Upper Churchill power is waived.

Newfoundland and Labrador will immediately sell the power and energy to Hydro-Quebec at current market values until it is required in Labrador. Approximate sale value, initially, in excess of $20 million a year.

GWAC - Guaranteed Winter Availability Contract

The existing Churchill Falls plant will operate to provide peak capacity during winter months, in return for which Newfoundland and Labrador Hydro will receive approximately one billion dollars for the term of the agreement (1998-2041), on average approximately $23 million annually.

Effective November 1, 1998.

This additional revenue ensures the financial viability of Churchill Falls (Labrador) Co.

ECONOMIC

Direct Employment (1998-2008)

Newfoundland and Labrador 13,200 person years

Quebec 3,700 person years

Cumulative Impacts on Canadian Economy (1998-2008)

Gross Domestic Product, (1997$ millions) 5,464

Personal Disposable Income, (1997$ millions) 1,851

Direct and spinoff employment, person years 49,000

Direct and spinoff employment, jobs 67,000

FINANCIAL

Total financial benefits accruing to the province over the 30-year contract period, including GWAC and the 130 megawatt recall which commence in 1998, are estimated to exceed $5 billion, not allowing for equalization tax-backs, based on realistic market price assumptions. Benefits will be higher should market prices increase beyond this amount.

EMISSION CREDITS

These credits could represent considerable additional value in the future as emission trading mechanisms become further refined and accepted.

Fact Sheet

Transmission Line to the Island of Newfoundland

Agreed Terms of Reference for
Canada/Newfoundland & Labrador Joint Feasibility Studies

Description

In order to allow consumers on the island access to power generated by these new projects, a transmission line linking the island portion of the province to Labrador is a key component. A 800 MW HVDC infeed is proposed to link Gull Island in Labrador to Soldiers Pond (near Holyrood). The line costing roughly $2.2 B would be 1126 kilometres long, crossing the Strait of Belle Isle via four submarine cables.

Objective

To ensure access to a secure, renewable source of power and stable electrical rates in the province, as well as meeting the future demand of power and energy.

Joint Feasibility and Financing Studies

Canada and Newfoundland and Labrador have agreed to enter into a set of detailed feasibility and financing studies over the next six to ten months. This arrangement follows preliminary work that has been carried out by officials from the two levels of government over the past two months. The studies will also analyse the role that greenhouse gas credits can play in bringing the project to fruition.

There will be four Federal/Provincial working groups or "tables" set up to examine various aspects of the transmission line. The four groups will be coordinated by a senior official from each of the two governments.

One working group will focus on the economic feasibility of the transmission line. The group will examine the future electricity demands on the Island and the alternatives for meeting these needs to confirm that the proposal for Labrador power is the optimal choice. In addition, if the transmission line is not fully financeable, this group will review what additional means of support would be required.

A second table will examine the methods of obtaining value for the reduction in greenhouse gas emissions that will be made possible through the use of electricity generated at the Labrador renewable hydro-electric sites rather than by burning fossil fuels. This group will quantify the carbon emissions savings for the larger project as well as the savings that will be created on the Island.

A third working group will do a detailed analysis of the benefits to the economy, -- to include impacts on Gross Domestic Product, employment, incomes, equalization and government revenues -- as a result of the construction and operation of the various components of the Labrador power project. This will include those benefits uniquely attributable to the proposed Island infeed line.

A fourth group will consider the environmental and aboriginal issues and ensure all Federal and Provincial obligations are honoured and appropriate processes are harmonized.

Fact Sheet

Marketing Arrangements

Hydro-Quebec Energy Services will market exported power and energy from the new developments in Labrador.

Under the marketing arrangement, the project will have the full benefit of higher market prices, with the additional protection of a floor price guarantee from Hydro Quebec in the event of lower market prices.

Hydro-Quebec Energy Services will consult and seek agreement from the owners before implementing the marketing program for energy and power. The marketing program will be subject to periodic review and revision, as necessary.

Hydro-Quebec Energy Services will receive a marketing fee of 2.8 per cent for marketing this power and for bearing the associated risks.

Under the Power Purchase Agreement, Hydro Quebec Energy Services agrees to "take or pay" all the power and energy produced for export by and available from the Gull Island or Upper Churchill extension.

Fact Sheet

Price and Marketing Issues

Price: There is no upper limit on the price per kilowatt hour that Newfoundland and Labrador Hydro will receive for power sold over the Hydro Quebec power grid. It will be wholly determined by market prices.

Floor Price: Hydro-Quebec has guaranteed a floor price, in the event that the market price for electricity should drop below the level necessary to cover the project's expenses.

Fact Sheet

Royalty Regime

In recognition of Newfoundland and Labrador's ownership of the water resources on the Lower Churchill there will be a royalty applicable to the Gull Island project and Muskrat Falls, if it is developed.

This royalty will be similar to the offshore generic royalty regime by ensuring that as the project becomes more profitable, Newfoundland and Labrador's share of the revenues from the project will increase.

The project will generate a certain rate of return for the equity holders before a royalty will apply.

The rate of royalty will reach 50 per cent of the cash flows from the project above the specified rate of return.This, combined with Newfoundland and Labrador=s equity share of 65.8 per cent, will yield almost 83 per cent of marginal revenues.

The negotiation of a Memorandum of Understanding will include the negotiation of the details of the royalty structure such as royalty rates, when the royalty becomes applicable and how the royalties will be calculated.

The regime will be designed to ensure that as profitability increases, so will royalty rates and consequently government royalty revenues. This will ensure that the Province will be the primary beneficiary of any windfall profits generated from the project.

Fact Sheet

Aboriginal/Environmental

Status of Land Claim Negotiations with the Innu Nation in Labrador : In November 1997, the parties (Innu Nation, Government of Newfoundland and Labrador, and the federal government) agreed to and have embarked upon an accelerated negotiating process to resolve the Innu Nation's land claim, which was first accepted for negotiations in October 1990.

Aboriginal Role in further development of the Churchill River system: Government is committed to addressing legitimate Aboriginal claims and interests in an equitable manner through land claim agreements. Newfoundland and Labrador Hydro and Hydro-Quebec are committed to working cooperatively with Aboriginal groups to ensure their legitimate Aboriginal interests are addressed in a fair and equitable manner.

Environmental Considerations: This, and any development in the province, will be subject to a full and proper environmental assessment process, and will be carried out in an environmentally sensitive manner. The assessment process will involve affected Aboriginal groups.

Fact Sheet

Comparison of Upper and Lower Churchill Developments

GLOSSARY OF TERMS

Alternating Current (AC)

A periodic current which has alternately positive and negative values. It is a current that reverses its direction of flow at regularly recurring intervals of time.

Direct Current (DC)

An electric current that flows in one direction.

Energy

The amount of electricity actually delivered or consumed over a certain period of time. Electrical energy is measured in watt-hours and multiples thereof. If a 60-watt bulb burns for two hours, it consumes 120 watt-hours of energy. If a 600-megawatt generating station runs at full capacity for just one hour, it delivers 600 megawatt-hours - that's 600,000 kilowatt-hours-of energy.

Generator

A machine for transforming mechanical energy into electric energy.

Hydro-electric generating station

A station in which the force of water spins turbines to drive electric generators. This is a general term for a powerhouse, dam, headpond and a means of carrying from the headpond to the powerhouse.

Installed capacity

The sum of the full-load continuous ratings of all the generators in a station or the system.

Kilowatt

One thousand watts. Abbreviated kW.

Kilowatt-hour

The basic unit of electric energy equal to one kilowatt supplied steadily for one hour. Abbreviated as kWh

Market Netback

The final market price less all costs related to getting the electricity to market (e.g. transmission costs).

Megawatt

One thousand kilowatts or one million watts. Abbreviated as MW. A gigawatt is one million kilowatts; a terawatt equals one billion kilowatts.

Mill

One-tenth of a cent. A unit used to express the cost of supplying electric energy.

Penstock

A closed conduit for supplying water under pressure to a turbine.

Power

The capacity of potential to generate or consume electricity, and is measured in watts or multiples of watts. A 60-watt bulb consumes 60 watts of electricity, while a 600-megawatt generation station has the potential to deliver 600 megawatts (600 million watts) of electricity.

Transformer

An electro-magnetic device for changing alternating-current electricity to either higher or lower voltage. Transformers make transmission of power over long distances possible.

Transmission Line

The conductors and their supporting towers, used to convey electric energy from a generating station to a distant point.

Turbine

A rotating machine for transforming the energy of steam, gases or falling water into mechanical energy.

Watt

The basic unit of electric power, expressing the rate at which electric energy is being expended. Power in watts equals the current in amperes times the voltage in volts. Abbreviated as W.

 

1998 03 09 2:45 p.m.