March 9, 1998
(Executive Council)

The following is the text of an address to the Province by Brian Tobin, Premier of Newfoundland and Labrador:

FURTHER DEVELOPMENT OF THE CHURCHILL RIVER SYSTEM

Good evening, ladies and gentlemen.

As you know, earlier today in Churchill Falls, I was joined by Premier Lucien Bouchard of Quebec in putting before you a plan for the further development of 3200 m.w. of hydro electric power on the Churchill River system in Labrador.

This concept for future hydro electric development is the result of more than a year of discussions. In setting before you this plan for development we have retained the assistance of the best legal, financial and technical minds available to us.

As Premier of this province, I understand only too well the burden that falls on me and the government I lead never to repeat the resource giveaways that have denied us prosperity in the past.

When it is necessary to say no to resource proposals that do not fairly benefit our province we must never hesitate to do so. We are saying no today to Inco .... no to the development of a mine at Voisey's Bay, unless and until there is a commitment to a smelter/refinery complex for our province. That is government's position. It is my position and it will not change.

But just as we must never fear to say no when it is right and necessary .... so too, we must never fear to say yes when we have achieved a proposal for development that is fair and beneficial to Newfoundland and Labrador.

I believe that the proposals I put before you earlier today in Churchill Falls are the right proposals .. right now for Newfoundland and Labrador.

These proposals can never compensate us for what we've lost in past decades on the Upper Churchill deal. Successive governments have tried and none have been able to re-write the past... but we can and we must rewrite our future... beginning today.

In re-writing that future we must extend a full opportunity for involvement by the Innu Nation.

Any further development of the Churchill River system must also respect the right of the Innu Nation of Labrador to share in the benefit of such a development.

Now that Newfoundland and Labrador and Quebec have agreed to a set of proposals that have been referred to formal negotiations,I believe it is important to invite the appropriate participation of the Innu Nation.

This I will do on behalf of the people of this province.

Let us now examine these proposals and see how they benefit Newfoundland and Labrador. As you know if we do nothing, if we simply allow the current contract to run its course until 2041, the Upper Churchill contract will result in a cash deficiency of $300 million. The proposal I have outlined today will move us from that position of loss at the Upper Churchill to a gain of more than $2.6 billion. In setting out this 2.6 billion dollar number I am dealing only with the Upper Churchill portion of the river. I will deal with the Lower Churchill in a few minutes.

The proposal before us today regarding the Upper Churchill has four important elements.

1. First, Newfoundland and Labrador has not, despite many past attempts by Quebec, has not agreed to extend past 2016 any further protection for Hydro Quebec against taxation on the export of the sale of electricity. We have preserved all of our rights in this regard.

2. Quebec has agreed effective today's date, to waive recall provisions on a block of 130 m.w. of power -which is the remainder of a block of 300 m.w. that we are entitled to receive under the original contract. The original contract required us to give Quebec three years notice of recall of this power. It also restricted us to use the 300 m.w. of power in Newfoundland and Labrador. Since we have only been able to use 170 m.w. of the 300 m.w. block in Labrador -Quebec has had the benefit of the remaining 130 m.w. of power.
   
   
   Effective today, Quebec has waived recall rules and has transferred ownership of this 130 m.w. of power to Newfoundland and Labrador and has agreed to allow us to sell it for use in the North American market place.
   
   
   Since we are acquiring this block at very low Upper Churchill contract rates of 2.7 mils and reselling it at today's market prices -Newfoundland and Labrador will gain an additional 23 million dollars a year in revenue from this transaction. This measure is not tied to the completion of formal negotiations. It is unconditionally provided to us effective today at our request, as a first step in building a better relationship with Quebec.

3. The third measure we have negotiated is a guaranteed winter availability contract. This is a new contract that will run beside the current Upper Churchill contract until 2041. In this new contract, Quebec agrees to pay on average an additional $34 million a year, beginning this November for guaranteed peak power during winter months.
   
   
   This measure alone adds another $1 billion to our bottom line at the Upper Churchill.

4. The last and, I believe, most significant change to the Upper Churchill Power system is a plan to construct at the Upper Churchill Power site, a new power house and two new turbines to add 1,000 new m.w. of power to the existing 5200 m.w. of capacity at the Upper Churchill.
   
   
   As you know it takes more than a new power house and two new turbines to generate new power. It takes water .... and the water will come from Quebec. Quebec has agreed to partially divert and reverse the flow of two rivers in Quebec back into Labrador. Water from the St. Jean and Romaine rivers would be diverted into the Smallwood reservoir to provide additional hydro generating capacity.
   
   
   The new water from Quebec will generate 1,000 m.w. of new power at the Upper Churchill and, of course, will also help to increase the flow of water and creation of power at the Lower Churchill.
   
   
   The Upper Churchill Diversion project and construction of a new power house will be financed at a cost of $1.3 billion by Quebec and from project revenues. Quebec will guarantee a floor price for the power. Quebec will receive no royalties for its water. The equity in the project will be 65.8% Newfoundland and Labrador - 34.2% for Quebec.
   
   
   This project will provide, at today's prices, another $1.1 billion to Newfoundland and Labrador from the Upper Churchill system.

Taken together, these new initiatives - the recall of 130 m.w. of power worth $23 million a year; the Guaranteed Winter Availability Contract with average revenues of $34 million a year; and a 65.8 percent equity in 1,000 m.w. of new power at the Upper Churchill will move Newfoundland and Labrador from a loss position today on the Upper Churchill system to a gain for Newfoundland and Labrador of $2.6 billion dollars on the Upper Churchill River system.

If power rates increase dramatically over the next 30 years, then of course our share of profits increase dramatically as well. The numbers I'm giving you tonight assume an inflation rate of only 1/2 of one percent annually. I believe it is important to be prudent in our forecasting.

That completes a quick review of the Upper Churchill proposals. Let us turn now to the Lower Churchill proposals.

The Lower Churchill Project would see the development of the 2200 m.w. Gull Island site. Again,the ownership would be split 65.8% to 34.2% in Newfoundland and Labrador's favour. One thousand m.w. of the 2200 m.w. of new power from the Gull Island site will be available for use in our province - both in Labrador and on the island.

Royalties from this project would be based on a profit sensitive regime similar to our new generic offshore oil and gas regime. In other words, the more profit the project produces the higher Newfoundland and Labrador's royalties become.

In effect, if this project in future produces windfall profit then it is Newfoundland and Labrador that catches the wind and the windfall. Quebec, as a minority shareholder will be entitled to an 11.5% rate of return on this investment (the same as we will be) but the royalty regime on the new Lower Churchill development clearly favours Newfoundland and Labrador.

That is a normal reward for developing our resources, in our province. That's the way it should have been done 30 years ago on the original Upper Churchill contract.

The Lower Churchill Project, again using current market prices and a 1/2 of 1 percent inflation factor will generate another $2.6 billion in dividends for Newfoundland and Labrador.

On both the Upper Churchill Diversion project and on the Lower Churchill Gull Island Development, Quebec will provide a floor price guarantee to ensure financing is available for both projects. In providing such a floor price guarantee Hydro Quebec assumes the vast majority of any financial risk on these projects.

On the other hand the profit sensitive royalty regime we have agreed to ensures the upside financial benefit comes to Newfoundland and Labrador.

Of the 3200 m.w. of new power produced -2200 m.w. will be sold in North American markets over the Hydro Quebec system. Quebec will receive normal tolling and marketing fees.

However, the reality is that neither the existing Quebec transmission system or the transmission system in Labrador are adequate to carry 2200 m.w. of new power to the North American markets. Three billion dollars of system upgrades or new construction will be required in both Labrador and in Quebec.

The financing of these new transmission facilities will be provided by Hydro Quebec.

Hydro Quebec has agreed to roll the $3 billion required into their existing 30 billion dollar transmission network in Quebec. In other words, Hydro Quebec will seek a price increase from their Quebec base customers to cover the cost of new transmission facilities both in Quebec and in Labrador.

In exchange, Hydro Quebec will take a 50/50 ownership position with Newfoundland and Labrador Hydro in the $1.4 billion of new transmission facilities to be built in Labrador from Gull Island and Churchill Falls to the Quebec border.

However, once the transmission facilities are paid for over 30 years - the ownership of these facilities in Labrador reverts 100% to Newfoundland and Labrador Hydro.

The simple fact of the matter is that because of current low prices for electricity, both the Upper Churchill Diversion and the Lower Churchill Gull Island project would not be viable without Hydro Quebec's Agreement to roll new transmission costs into their existing system. This decision, together with Quebec=s decision to divert Quebec rivers into our province are significant contributions by Hydro Quebec and the Government of Quebec towards building a new relationship with Newfoundland and Labrador Hydro and with the Government of Newfoundland and Labrador.

The proposed 800 m.w. Muskrat Falls site is not a definite part of the proposal at this time. The reason is straightforward. With tight profit margins arising out of a low cost electricity market, the site at Muskrat Falls may not be viable at this time.

Muskrat Falls, with a development cost of $2.1 billion needs further assessment. We have agreed to cost share with Quebec up to $20 million on a further assessment on the viability of this project.

The final component of the proposal I put before you today does not involve Hydro Quebec or the Quebec government.

As part of this development proposal, as I said earlier, we insisted on recalling 1,000 m.w. of power for our use in Labrador and on the island. Quebec agreed. Now we need to study the feasibility of building a $2 billion transmission system from Gull Island across the Strait of Bell Isle to the island portion of the province.

I have asked the Prime Minister and the Government of Canada to join Newfoundland and Labrador in a feasibility study into both the technical and financial requirements of such a project. The Government of Canada has agreed.

In the months ahead a full analysis will be made of the proposed interconnect between Labrador and the island portion of the province.

Our objective is to provide long-term stable electricity rates for the people of our province. We have reached the point where new power requirements increasingly have to be met by burning oil.

There are very few suitable hydro sites left for development on the island, and quite frankly burning oil is both expensive and runs contrary to Canada's commitment to lower greenhouse gas emissions in Kyoto, Japan.

The development of the Lower Churchill and Upper Churchill Diversions can contribute significantly to Canada's commitments to lower greenhouse gas emissions.

Hydro power is green power and already a new system of buying and selling greenhouse gas emissions credits is emerging.

Under our arrangement with Quebec, Newfoundland and Labrador is entitled to 100% of the greenhouse gas emissions credits for Gull Island and 50% of the emission credits from the Upper Churchill Diversion projects. Our intent is to use those credits to help finance a transmission line to the island portion of the province.

The question of emission credits together with further technical and financial analysis must underlie any decision to proceed with an interconnect to the island. I look forward to working with the national government in providing answers to some of the questions posed by such a proposal.

These proposals represent an agreed approach to further hydro-electric developments between Newfoundland and Labrador and Quebec. To translate these proposals into reality requires legally binding agreements.

Today I have given a mandate to our chief negotiator, Jim Thistle, and to our legal, technical and financial team to formally begin negotiations with Hydro Quebec. These negotiations may require all of 1998 and part of 1999 to complete. It's important we make a start without delay.

In the meantime, my Cabinet colleagues and I, and officials of Newfoundland and Labrador Hydro will answer every question raised of us.

I know you will want a full opportunity to discuss and debate these proposals. They will be submitted for the full range of all applicable public regulatory review.

I want to assure you that government is particularly concerned about the impact on the environment and we will spare no expense to ensure as full an environmental assessment as possible under both federal and provincial legislation.

These projects are important and they are valuable; but so is our environment, and we must not squander it in haste.

Finally, you may have noticed that I haven't focused this evening on jobs. I haven't because I believe these projects must stand on their own merits in terms of long term benefits to our province. It is true these proposals will create thousands of construction jobs for Newfoundlanders and Labradorians for the projects in our province and thousands of jobs for Quebecers for the projects in Quebec.

The proposals I have put before you constitute one of the largest mega projects in the world today. This government will ensure maximum benefits for Newfoundland and Labrador workers and for our business community as well.

However, the thousands of jobs alone are not reason enough to go forward. We should only go forward if the long term benefits for this generation and future generations, are there.

I believe the benefits are there or I wouldn't be putting these proposals forward at this time.

I believe that when these proposals receive objective analysis by those who are neither friends nor foes, it will become clear that we now have the basis for moving forward with pride and dignity.

These proposals are solid. They are good for our province - I'm proud to be associated with the government that has negotiated them.

Tonight, I undertake to provide you with all the information you need to judge what government has done. An information brochure will be delivered to every home in the province.

I, Ministers of the government, and officials of Hydro, will be available to respond to every legitimate enquiry made of us.

With your support - I and the government I lead will work hard to make these proposals for development of our natural resources, for our benefit, a reality.

Thank you.