The original Muskrat Falls deal was designed to supply the island with low-cost hydro power to replace power generated at the oil-fired Holyrood power station and sell Emera 20 per cent of the output for use by its Nova Scotia Power subsidiary. The balance was going to be sold to 'lucrative U.S. power markets'. Of course, none of that happened.

It’s a mega-project with shaky economics, tons of nasty regional politics and the potential to cost billions of dollars to taxpayers. And I’m not talking about the Trans Mountain Pipeline.

The Muskrat Falls hydro-electric project is nearing completion and the project termed as a “boondoggle” by the CEO of Nalcor, the Crown corporation building this mess is in danger of turning Newfoundland and Labrador into a northern version of Puerto Rico, an island bogged down in debt it can’t repay.

If you’ll recall, the project got the go-ahead back during the 2011 election campaign when Stephen Harper, desperate to win seats in the province, promised federal loan guarantees to get the dam and its lengthy transmission system from Labrador to the island and on to Nova Scotia built, despite an unconvincing economic case.

Harper called building Muskrat Falls “an unprecedented opportunity and a real game changer.” Danny Williams, the fast-talking snake oil salesman who happened to be Newfoundland’s premier at the time, argued that taking power from Muskrat Falls and sending it on its long, convoluted route across Atlantic Canada would end the “geographic stranglehold that Quebec has had for too long on us.”

The project was mainly aimed at sticking it to Quebec, which Newfoundlanders believed had taken them to the cleaners with original Churchill Falls power deal. Of course, with Muskrat Falls, Newfoundlanders have only succeeded in sticking it to themselves.

The transmission route always seemed the work of a crackpot. If Williams were a consultant on pipeline options for the Alberta oil sands, he’d probably suggest the pipeline be taken north through the Northwest Territories, the Yukon and end up on the coast of Alaska, just to avoid British Columbia.

The original Muskrat Falls deal was designed to supply the island with low-cost hydro power to replace power generated at the oil-fired Holyrood power station and sell Emera 20 per cent of the output for use by its Nova Scotia Power subsidiary. The balance was going to be sold to “lucrative U.S. power markets.”

Of course, none of that happened. The cost of the project more than doubled to $12.7 billion and U.S. spot power markets are now at bottom-feeding prices because of cheap shale gas while Emera, the parent of Nova Scotia Power is basically protected from the huge cost overrun at the dam site.

Left holding the bag are Newfoundland electricity users. Power costs are expected to double over the next few years to an extortionate 24 cents per kilowatt hour from about 12 cents. It’s estimated that each cent of reduction in the power price would cost the province $60-million to $70-million, money it just doesn’t have. Spot electricity prices are in the range of 3 cents.

One potential customer for this spot power is none other than Hydro-Quebec, which could get the Muskrat Falls power through a connection with the much larger Churchill Falls project and send it to Quebec. But it’s not likely to pay much for the power and any deal with Quebec would be politically hard to swallow for Newfoundlanders.

Remember this is a province with a sluggish economy, a declining population and an unemployment rate of 15.5 per cent, at the peak of the economic cycle.

David Vardy, a former senior Newfoundland public servant and economist who has been critical of the project from its inception, is blunt. Once Muskrat Falls officially comes on-stream in 2020, it will require hundreds of millions of dollars to service its debt, money the province and Nalcor just don’t have.

“There’s an illusion out there that this is a self-financing project,” he says. “That’s absurd. Our ability to sustain this just isn’t there.”

If power prices go as high as suggested, Vardy predicts a collapse in electricity demand in the province as residents abandon electric heating in favour of better insulation, heat pumps, wood or heating oil. The provincial government has promised to subsidize power rates but it’s in desperate financial shape, its credit rating a breath away from junk-bond status

“We’re probably a basket case in the same way as Puerto Rico,” Vardy continues.

Should anybody outside of Newfoundland care? While the federal government doesn’t own Muskrat Falls outright, the way it will end up owning Trans Mountain, it has promised loan guarantees totalling $9.2-billion for the dam and the Maritime Link between Newfoundland and Nova Scotia.

The only solution, says Vardy, is a major write-down in the value of Muskrat Falls, which can only come at a cost to the federal treasury. How Ottawa achieves this without anybody noticing remains to be seen.

Right now, the loan guarantee is buried in an appendix of Ottawa’s Public Accounts, where it’s hoped nobody will notice. But a big writedown will have an impact on the bottom line and will have to be paid for somehow. And if Ottawa foots even part of the bill, it will probably also insist on serious oversight of the province’s finances for several years.

Despite the looming catastrophe, neither Ottawa or St. John’s have any incentive to deal with the issue now. While most construction is completed, there’s still work to be done before the dam officially goes live, likely sometime late in 2020 when interest charges on the project officially start tallying up.

And with elections expected in both jurisdictions in 2019, it’s unlikely we will hear a peep out of the politicians about the project now. But when the water hits those turbines at Muskrat Falls, it won’t be pretty.

.—

The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.