Muskrat Falls brings to mind N.L. government boondoggles of the past
'Cheap energy' promise has let the province down before, just as Ray Guy warned
On July 1st, when the first of what promises to be a series of jumps to hydro bills across the province came into effect, payback time for the over-budget and behind-schedule Muskrat Falls hydro project arrived.
The upcoming public inquiry into how the Labrador hydro project went wrong will be the largest since the 1982 inquiry into the sinking of the Ocean Ranger drilling rig, which took 84 lives.
Led by a competent jurist and able legal counsel, with an ample budget and the power to issue subpoenas and take evidence under oath, the odds are the Muskrat Falls inquiry will find answers, but it's not likely to offer much comfort.
For those who can't wait for the details of lousy assumptions, flawed projections and hubris, I recommend a 45-year-old column by the late Ray Guy, the wicked must-read columnist for the then-Evening Telegram newspaper — he habitually called Joey Smallwood "Joey Ratso Smallpox."
By chance I read the 1973 column "We were going to be stogged to the gills with cheap electricity" recently, and was reminded that politicians and government-owned power companies have been making bad investments, quite apart from the Churchill Falls debacle, for decades.
The promise of 'cheap power'
In 1973, the final phase of the Bay D'Espoir hydro project was completed and the province was waking up from the dream that new industries would be attracted by then-Premier Smallwood's promise of "cheap power."
Only one major industry with any staying power had taken Smallwood's bait. It was the Electric Reduction Company of Canada (ERCO). It produced elemental phosphorus. It was a boondoggle.
The Bay D'Espoir project was launched in 1964 by the Newfoundland and Labrador Power Commission, the government-owned Nalcor of its day.
In a paper presented at a 1972 industry association meeting, the Power Commission described the Bay D'Espoir project as part of "a giant step approach" to meeting demand on the island, crediting the "fortitude" of one or two individuals in government "to stand by what they knew was necessary to meet the future energy requirement of the province."
They claimed there was a "crying need" that had to be met and it was met by the "unrelenting efforts of one or two to bulldoze all obstacles aside" including the critics "who lacked sufficient vision or knowledge of the project or its implications on the economy."
Sound familiar?
In a 2001 history of the electrification of the island, Michelle McBride notes that in the 1950s Joey Smallwood wanted to build a pulp and paper mill in Bay D'Espoir and an aluminum plant on the south coast. To do that, he needed power.
In 1964 the government-owned Power Commission launched the Bay D'Espoir project. In budget speeches in 1969 and '70, Smallwood's government anticipated an oil refinery and pulp and paper mill in Come by Chance; a linerboard mill, sawmill and hockey stick plant in Stephenville; a forest products plant in Hawkes Bay; and the ERCO plant in Long Harbour.
Problems with ERCO
It's probably fair to say things did not unfold as Smallwood had hoped.
The Come by Chance refinery produced its first oil in 1973. By 1976 it had earned the distinction of being, at that time, the single largest bankruptcy in Canadian history.
ERCO went into production in Long Harbour in 1968 and at its peak it consumed 14 per cent of all the power produced on the island, an amount on par at the time with the power consumption in St. John's.
Within months of opening, ERCO shut down when its industrial discharges killed fish in Placentia Bay. That scare, along with other environmental and health concerns, plagued the phosphorus plant. By 1989, it was gone.
What had kept it running for about 20 years, however, was cheap power produced at 5 cents per kilowatt, and sold initially to ERCO for 2.5 cents per kilowatt.
The subsidy caused Ray Guy — who persisted in calling the province "the country" — to write that it would have been, "cheaper in the long run for the country to pay every permanent worker there $10,000 a year in welfare for the next 30 years."
Lessons learned
Buying jobs with cheap power did not work, but there is another lesson to be learned from the Smallwood/Newfoundland and Labrador Power Commission era.
Following the launch of the Bay D'Espoir project in 1964, forecasts of electrical supply and demand were built on the premise of ERCO gobbling up a large chunk of the supply. More power would be needed, so the decision was made to build an oil-fired generating station in Holyrood in the 1970s.
Fast-forward to 2012.
In the run-up to the final approval of the Muskrat Falls project, experts at Nalcor and the provincial Ministry of Natural Resources argued that more power was needed. They claimed Muskrat Falls was the least-cost option. The government experts forecast that the cost of operating the oil-fired plant at Holyrood would more than double.
They were wrong.
The experts at the ministry and Nalcor said the 2011 cost of fuel for Holyrood was $135 million. They predicted that the cost would more than double to $324 million by 2017, but the price of oil did not increase — it fell dramatically.
The average annual cost of OPEC crude in 2011 was $107.46 US per barrel. By 2017 it had declined by more than 50 per cent, reaching $52.51 US per barrel.
Ray Guy would have loved the irony.
In the 1960s, the notion that cheap power would generate industrial growth prevailed. Then the experts anticipated that the industrial growth would generate demand for more power. The Holyrood plant was built to meet that anticipated demand.
Forty years later, the experts' assumptions of future oil prices and the cost of operating the Holyrood plant became a key factor in the decision to build the Muskrat Falls project. The critics at the time said the oil price assumptions were wrong. Somebody in government had the fortitude to bulldoze the critics aside.
Right, Ray. I know. Wrong, wrong, wrong again.
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