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Quebec needs more than bons mots to bury the hatchet with Newfoundland

Ottawa's decision to extend an additional $2.9-billion loan guarantee to enable Newfoundland to proceed with its ruinous Muskrat Falls hydroelectric project looks a lot more like a bailout than the investment in clean energy infrastructure that Natural Resources Minister Jim Carr likes to call it.

Coming on top of the $5-billion federal guarantee the former Conservative government provided to Muskrat Falls, and on top of a separate $1.3-billion guarantee for an underwater transmission link from Newfoundland to Nova Scotia, the extra backstop rewards Newfoundland for its bet on a project that even the executive now in charge of it concedes is a "boondoggle."

The guarantee will enable provincial government-owned utility Nalcor to complete construction of an 824-megawatt hydro generating station and undersea transmission line from Labrador to the island of Newfoundland that should never have seen the light of day.

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Related: 'It's just getting worse': Newfoundland's economic boom goes bust

Konrad Yakabuski: Muskrat Falls has become a millstone around Newfoundland's neck

Muskrat Falls is the legacy of former premier Danny Williams's decision to snub Quebec by going it alone on a $6-billion hydro project – now projected to cost $11.4-billion and rising – that would restore provincial pride, which was still hurting after the 1969 Churchill Falls deal. Under that agreement, Hydro-Québec buys virtually all the power from the 5,400 MW Churchill Falls generating station at 0.2 cents a kilowatt hour and resells it to customers in Quebec and the United States at anywhere from 20 time to 50 times that price.

Newfoundland customers will be paying more than 100 times the Churchill Falls rate for their own electricity – about 21 cents a kw/h – once Muskrat Falls begins producing power in 2021. And that's provided the project does not face additional delays and cost overruns, which it will considering recent undertakings by the province to address the higher methylmercury levels stemming from the project.

All this comes as Newfoundland is reeling from the oil bust and racking up record public debt.

You'd think even Quebec would show a little mercy. But Intergovernmental Affairs Minister Jean-Marc Fournier blew a gasket when Mr. Carr announced the new guarantee for Muskrat Falls, accusing Ottawa of creating unfair competition for Hydro-Québec and threatening legal action.

It turns out Mr. Fournier's outburst was a case of political overacting. Within hours, Quebec Premier Philippe Couillard was doing damage control, inviting Newfoundland Premier Dwight Ball to work on "win-win" future hydro projects together. Quebec Natural Resources Minister Pierre Arcand even suggested this week that the province would be willing to reopen the Churchill Falls contract, which expires in 2041, in order to secure a deal on new projects with Newfoundland.

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Even Mr. Fournier has struck a more conciliatory tone, although he still insists that Newfoundland must abandon current litigation regarding Churchill Falls before Quebec commits to official talks.

This week, Mr. Ball denied suggestions that secret talks were already under way. But he did not rule out future discussions, saying: "I'm not going to get stuck in the past. … If there is a deal to be had, we would want to explore those options."

Progressive Conservative Leader Paul Davis pounced on that. "After effort after effort by previous governments of all stripes to try to resolve the differences [with] Quebec, they held us at our knees," he said. "That's what's wrong with talking to Quebec."

In 1998, Quebec and Newfoundland agreed to jointly develop the 2,000 MW Gull Island hydro project, also on the Churchill River. However, the project never got off the ground before Mr. Williams was elected in 2003. Experts had identified Gull Island as the most economically attractive undeveloped big hydro site in Canada. But it was too big of a bite for tiny Newfoundland to chew off on its own, so Mr. Williams bet on the smaller Muskrat Falls site. Even that has turned out to be too big.

Quebec has a few reasons for offering to come back to the table now. Newfoundland has applied to the Supreme Court of Canada to overturn a recent Quebec Court of Appeal decision rejecting Nalcor's contention that Hydro-Québec has violated the Churchill deal's "good faith" clause by refusing to renegotiate the agreement's financial terms. Newfoundland thinks it has a much better chance of winning at the Supreme Court than in Quebec's courts. Quebec might agree.

There is also the question of a water-management agreement governing flows on the Churchill River. Nalcor contends that the agreement allows it to manage the river to ensure Muskrat Falls can produce power to capacity. But that could come at the expense of Churchill Falls – and Hydro-Québec's bottom line. That dispute is also before the courts and will likely end up before the Supreme Court.

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Still, the reservoir of resentment toward Quebec runs deep in Newfoundland. It will take a lot more than a few bons mots to drain it – more like a guarantee of cold, hard cash.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More

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