Newfoundland’s enduring power curse

The provincial and federal governments both had a hand in turning Muskrat Falls into a white elephant

Mistakes were made. That is how Prime Minister Justin Trudeau rationalized his government’s announcement this week of a $5.2-billion bailout for the disastrous Muskrat Falls hydroelectric project that threatened to send provincial power rates through the roof without more federal subsidies.

“The pressures and challenges faced by Newfoundlanders and Labradorians for the mistakes made in the past is something that Canadians all needed to step up on, and that’s exactly what we did,” Mr. Trudeau said in St. John’s after unveiling an aid package that will prevent provincial electricity prices from nearly doubling this year.

Mr. Trudeau did not say which “mistakes” he was referring to. Perhaps that was because there are too many of them to enumerate during a short pre-electoral pit stop in Newfoundland, where the Liberals hold all but one of the province’s seven seats. Or perhaps because it would have raised questions about whether his government is only putting a Band-Aid solution on a systemic problem.

The deal announced Wednesday does not correct past mistakes nor prevent future ones. Indeed, it may even encourage them.

When it comes to Muskrat Falls, the most glaring and fatal mistake of all was made by former Progressive Conservative premier Danny Williams, who insisted that tiny Newfoundland could go it alone in developing the 824-megawatt generating station on the Lower Churchill River that had for decades been the object of on-again-off-again negotiations with Quebec and Ontario.

Resentment among Newfoundlanders toward Quebec – which has reaped windfall profits from its 1969 contract to purchase power from the original 5,400megawatt Churchill Falls project in Labrador, while leaving only crumbs for Newfoundland – enabled Mr. Williams to sell voters on Muskrat Falls more than a decade ago. He promised it would liberate his province from “the geographic stranglehold which Quebec has had for too long on us” thanks to underwater transmission lines from Labrador to the island of Newfoundland, and from there on to Nova Scotia and U.S. markets.

It was pure folly to believe that such a scheme could ever be economically viable. Financing only became possible when former Conservative prime minister Stephen Harper, casting for votes in advance of the 2011 federal election, promised federal loan guarantees for the project, then budgeted at $6.2-billion, but whose price tag has since risen to $13-billion and counting.

Mr. Harper credited then-premier Kathy Dunderdale, who had succeeded Mr. Williams, with persuading him “that there is a sound business case for the project with the risks being shared by the provinces, utilities and investors.” Nova Scotia electricity provider Emera Inc. had signed on to buy 20 per cent of the power supplied by Muskrat Falls and partnered on the Maritime Link underwater transmission line.

But that one deal alone could not justify the risk Newfoundland (or Ottawa) assumed.

As Muskrat Falls overshot its budget, Mr. Trudeau’s government increased the federal loan guarantees to $7.9-billion from $5-billion. And in December, Ottawa waived $844-million in related payments it was due from Nalcor Energy, the soon-tobe-dismantled Newfoundland Crown corporation responsible for Muskrat Falls.

Wednesday’s deal, which requires the adoption of federal legislation before being implemented, would see Ottawa provide an additional $1-billion loan guarantee, invest $1-billion in the Labrador-Island underwater transmission line and transfer federal revenues from the Hibernia offshore oil project to the province between now and 2047. The funds would enable Newfoundland to avoid raising electricity rates in the province to 23 cents per kilowatt-hour from 13 cents. Rates would instead go up to 14.7 cents per kw/h and rise by about 2.25 per cent a year going forward.

Even if the federal subsidies made power from Muskrat Falls competitive – which they do not – they preclude sales in U.S. markets. U.S. competitors would challenge any such sales under existing trade agreements. So would Hydro-Québec, which remains fiercely protective of its business in Northeastern U.S. electricity markets.

Which brings us back to the “mistake” that is at the root of Newfoundland’s power curse since it joined Canada in 1949.

In 1962, Conservative prime minister John Diefenbaker proposed a “national” electricity grid that “would be the counterpart, in the field of electrical energy, of the two transcontinental railways, the Trans-Canada Highway, the nationwide civil aviation system and the cross-Canada radio and telecommunications chains.”

In 1966, Newfoundland premier Joey Smallwood asked Mr. Diefenbaker’s successor, Liberal prime minister Lester Pearson, to take a step in that direction by invoking Section 92 of the British North America Act to allow for the construction of a transmission line from Churchill Falls through Quebec “for the general advantage of Canada.” Mr. Pearson’s refusal left Smallwood a captive of Quebec, leading to the lopsided contract that haunts Newfoundland still – and which runs until 2041.

It remains that Muskrat Falls was conceived out of a desire for revenge. And that remains the most unforgivable mistake of them all.