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New Opportunity and Challenge in the Deregulated Energy Market:
 Power from the Lower Churchill River in Labrador

presented at the
New England Governors and Eastern Canadian Premiers Conference
by Premier Brian Tobin
Newport, Rhode Island
June 3, 1997

The National Energy Board of Canada has ranked the 2200 megawatt Gull Island site on the Lower Churchill River in Labrador as the lowest cost undeveloped hydro electric site on the North American continent. Just a few miles down stream, the Muskrat Falls site has been ranked as the fifth lowest cost hydro electrical site on the continent. Together, these two sites are capable of producing 17 billion kilowatt hours of environmentally clean, stable, and competitively priced electricity.

The objective of my remarks today is to talk about an opportunity and a challenge for this development that has been presented by the new deregulated market for electricity. The opportunity and the challenge both have been created by FERC Order 888. The major opportunity for us is that of supplying the Northeast U.S. market with the environmentally friendly, or "green", electric power from the Lower Churchill River in Labrador. That is also our major challenge to bring this power to market in the new competitive environment.

Change, and our response to the opportunity and challenge it presents, has become a central feature of our economic life.

Nowhere is this more true than in the generation, distribution and marketing of electricity. For most of this century for the past sixty or more years the generation, distribution and marketing of electricity has been regarded as a natural monopoly. As such, we all deemed it necessary to surround this industry with a complex regulatory structure.

As a result, there was little competition and limited consumer choice in the electricity industry. There was no incentive for producers to lower costs and increase their market share. There was no capability for the consumer, residential or industrial, to demand a lower price; or, if they were so inclined, to choose to pay a premium price for environmentally friendly energy or "green power" as it has become known.

For decades we all accepted the concept of electricity as a natural monopoly, just as naturally as we accepted the rhythm of day and night. But, the concept of a market force that rewards risk and offers consumer choice, has asserted its influence in the electricity industry. Openness and freedom of choice have finally come to the electricity industry in North America.

This new market structure is due in no small measure to the leadership of the U.S. Federal Energy Regulatory Commission (FERC). One year ago, FERC Order 888 established a fair and sustainable means of securing open and non-discriminatory trade in electricity at the wholesale level. The FERC has provided the new deregulated market environment, thereby allowing the benefits of technological change and economic advantage to get to the end consumer.

Utilities across North America are responding to this challenge. I was pleased to see, just a few weeks ago, that Hydro Quebec was successful in obtaining conditional FERC approval for a power marketing licence. I am confident Hydro-Quebec will meet these conditions. Newfoundland and Labrador Hydro intervened in that FERC hearing. The purpose of the intervention was not to protest or prevent Hydro-Quebec from achieving a power marketing licence. Indeed, our success in this new market is linked to Quebec meeting all the FERC conditions of open and transparent transmission access; and, that was the purpose of the intervention.

I congratulate Hydro-Quebec on its success, and FERC for the wisdom of its decision. Now we look forward to meeting the needs of the new market in accordance with the new FERC rules.

As an energy producer, Newfoundland and Labrador looks forward to the opportunity and challenges created by this new market.

Newfoundland and Labrador is a significant and growing energy economy. First crude oil production in our province will begin later this year. This production too represented technical and public policy challenges that had to be overcome. The giant Hibernia production platform is now completed and is being referred to as the eighth wonder of the world. Oil production from Hibernia and other fields is forecast to increase rapidly to one-third of Canada's total light crude oil production in the early years of the new century. In addition, my Province also has discovered resources of 8 trillion cubic feet of natural gas.

As we have met the challenges of offshore oil production, and as we will meet the challenges of producing offshore gas and bringing it to market, so too will we meet the challenges and opportunities of the deregulated electricity market.

The traditional entry barriers to electricity markets were not technical. They were institutional; and the new deregulated market has removed these barriers. Deregulation has created the opportunity for our province to become a full energy service provider in petroleum, gas, and electricity.

In Labrador we already have the single largest hydroelectric generating station in North America, which is the equivalent of almost three quarters of Canada's net electricity exports to the U.S.A. So, Newfoundland and Labrador is already a very significant supplier to the North American electricity market. I have no doubt that you are all aware of the dialogue between Quebec and ourselves concerning the Upper Churchill contract. That is a matter which we will continue to address.

Power from the Lower Churchill has two very important advantages; it is economically competitive, and it is environmentally friendly.

As I have noted, the National Energy Board of Canada has ranked the Lower Churchill as the lowest cost source of hydroelectric power on the North American continent. This, combined with the long term price stability of hydro electric power, places a special premium on this power.

The Lower Churchill has another premium, it is truly "green" power. Being hydraulic, this project is naturally environmentally clean in the sense that it does not produce any greenhouse gases. This advantage can only be expected to increase as environmental issues grow in importance. The equivalent amount of power produced by coal would emit more than 14 million tonnes of greenhouse gases each year every year. Even using the more efficient natural gas, to produce an equivalent amount of electricity would send between 6 and 8 million tonnes of greenhouse gases into the atmosphere each year every year.

The latest US Department of Energy forecast for electrical generation calls for a 58 percent, or 6.8 billion kilowatt hour increase in electricity generated from petroleum by 2010 right here in New England. Just this increase alone will require the burning of over 10 million barrels of oil per year, and will produce over 4 million tonnes of greenhouse gases. All of this, and more, can be avoided by the 17 billion kilowatt hours available from the Lower Churchill River. Alternatively, the 17 billion kilowatt hours that will be available from the Lower Churchill could replace all of the electricity that the US Department of Energy predicts will be produced from coal in New England by 2010.

The same Department of Energy forecast predicts that by 2010 only 2 percent of New England's electricity will come from environmentally friendly and long term stably priced hydro imports from Canada. Power from the Lower Churchill can increase that 2 percent up to 14 percent. At the same time, it could avoid altogether the need for any new petroleum fuelled production; and, reduce New England's dependence on coal fired generation from 12 percent to about 7.5 percent.

Another important advantage of this project, both from a cost and an environmental perspective, is its location. Being downstream from the existing Upper Churchill dam, it uses the same water storage. Thus, there will be no vast flooding of Labrador territory associated with this project. This project will be essentially a run-of-the-river hydro project. It will flood only a small fraction about five percent of the area typically flooded by a hydro project of this magnitude, and even that level of flooding will be confined to the steep walled river valley.

This project has already been subjected to, and cleared by, the Environmental Assessment process in Canada. This, however, was in 1980; and because of the elapsed time, the project will have to be assessed again. Therefore, before this power reaches your markets, the consumer will have the unique benefit that the project has been subjected to two environmental assessments.

When we bring the power to your market it will be competitively priced, as it must be in order to enter the market. It will also be stably priced over the longer term because it is hydro power and therefore not subject to the fluctuations of petroleum and gas prices. But in addition, it will be "green power", which will have passed two environmental assessments in Canada.

FERC Order 888, and the open transmission access it provides, has presented the opportunity to provide 17 billion kilowatt hours of competitive, stably priced and environmentally clean electrical power to the electricity markets of New England. It has also presented us with two challenges, both are financial. First, we must finance the project; and second, we must deliver the power at a competitive price.

In the old regulated markets, long term sales contracts were the staple of capital financing for large hydro projects. In the new deregulated market such contracts are no longer the norm. But, given all the positive features of this project, the new forces of creativity that have been unleashed in these markets will be more than capable of meeting this challenge.

These same new forces of creativity and competition will also drive us in our efforts to bring this power to your market at a price that is competitive with your other sources. If we fail to meet these challenges, the alternative is clear, you will not buy the power and we will not finance the project.

But, I am confident that the forces of competition, and the skill and ingenuity of our financiers and engineers can move the 17 billion kilowatt hours of power from the Lower Churchill River with negligible environmental impact, and deliver this power to you at a competitive price. An added premium for you is that it will help you reduce greenhouse gas emissions by millions of tonnes each year.

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