Gnarley’s Theory of Political Devolution Part II

The waitress returned with two virgin scotch on the
rocks.  The smile on her face was
recognition that she had seen this before; two friends about to embark on an
afternoon’s session.  But, unlike those
she had witnessed in the past, the conversation would not be about sports, cars
or women.  The subject, this afternoon,
was to be focused purely on politics; a vice as destructive as any other.

Although my old friend was certain to eventually lead
the discussion to Muskrat Falls, I was hoping to get his opinion on some other
burning issues.  I was particularly
interested in getting the old economist’s view of the Province’s fiscal

But, it was clear that Uncle Gnarley was not yet finished
with the topic of leadership.  To move
the conversation along, I lobbed what I clearly recognized was not a double
play pitch.

“Uncle Gnarley, if you put aside your belief that
Dunderdale is a lame duck Premier, what do you consider to be her biggest
weakness, as a leader?”

“Nav… a very good question.  The Premier has many admirable qualities
which are often overlooked by her detractors. 
She appears to be very hard working and has a reasonable intellect.   Although she represents Virgina Waters, she
is definitely not from town.  With the Province’s
sphere of influence becoming more Avalon centric, there is a geographic
disadvantage to any rural politician. 
Her heritage enhances her credibility, as she is not part of the
It must be remembered
that she was not born in wealth; her achievements are her own
.  These achievements are greater than being the
first female Premier…but, I expect that this, alone, will define her

It had seemed that the afternoon sun had put the generally
cantankerous man in a somewhat sober mood. 
This was odd considering that his third scotch was now, like our budget
surpluses, a footnote in history. 

“Uncle Gnarley, I did not expect such

With that, the old man looked up; his face clearly
indicated that his pause was not meant to be interpreted that he was

leadership, by acclamation, is not good for any business or
democracy.  Competition brings in new
ideas; it ignites debate, and lays the foundation for future public
policy.  However, when a leader is
appointed, as was Dunderdale, it will serve as an affirmation of the policies
and ideas of the previous leader.  The PC
leadership contest, of 2011, should have seen the first public debate on major
initiatives such as the Muskrat Falls Project. 

Instead, the anointed Dunderdale has embraced the
status quo.  She has not defined her own
vision for leadership, or the future of the Province.  She remains married to the policies of the
previous leader, seemingly oblivious to the changes in the world that now make
these policies obsolete.  Her conviction,
to defend these unsound policies, is a character flaw which has the Province
bearing over its own fiscal cliff”.

I believe Uncle Gnarley could sense the confusion in
my eyes. “For your own benefit”, he added, “I will put this in layman’s
terms: Dunderdale will not admit that her Administration has made a
mistake.  Her greatest flaw is her

With that Gnarley took a drink, and nodded to me, with
a not so discrete signal, that he was now finished.  No matter how much I wanted to come back with a
statement matching the self-proclaimed genius of the old economist, I could
not.  To maintain the healthy banter
I retorted: indeed a character flaw which neither of us share.   But, Uncle Gnarley, you have my interest
peaked.  Is the great mistake, to which
you refer, the continued support of the Muskrat Falls project?

“Nav, a mistake it is…but, in this case, it is
more the symptom”.

I took a drink, and was slightly frustrated as it
appeared to be an afternoon of riddles. 
I stayed silent with hope that the old man would continue. 

“The real mistake, of this government, is that
their entire policy seems to be predicated on the naive belief that energy
prices will return to the peak pricing seen in the period from 2006 to
2008.  The foundation of the Government’s
policies, whether it be increased government expenditure, investment in oil
projects, or even Muskrat Falls, is underpinned with the hope that oil will
return to 150 $/barrel, and that it will get there very soon!”  

With the labours of the afternoon dulling my cognitive
ability I had to ask for clarification. I am not sure what you mean, did
the government not budget on 124 $/barrel in 2012?

“Nav… as usual, I can depend on you to confirm
the obvious.  This might have been a plug
number, thought to be conservative, but to ensure a better than predicted,
fiscal performance.  But, make no mistake;
the government’s increased spending, their investments in Nalcor, and their
projections for electricity demand growth clearly demonstrate their hope that
the good times are once again just around the corner.  They are a Government steered by blinding

As the Premier said in the house last week, it was no
surprise that there is a deficit, and anyone smart enough to read the previous
budgets would have realized this fact. 
Well, this is true.  Since 2006,
this government has been spending like sailors on shore leave.  It is out of control and not
sustainable.  Some of the Government’s greatest allies  have identified this fact,
as have some of its most astute critics.

Even the Atlantic Institute of Market Studies, some seven
years ago, forecast what was going to happen within the decade. 
In her 2011 year end interview, with David Cochrane,
the Premier, herself, also identified that this was a major issue. 
Yet, there has been no action.  There has been no plan.  There has been no strategy to deal with this
spending crisis”.

I interjected, Uncle Gnarley, don’t you
mean deficit crisis.  Is this just as
much a revenue issue as it is a spending issue?  The old man looked at me with
frustration.  Uncle Gnarley had a great
head of steam, and was about to blow.

“Nav…  I
refuse to call this a revenue issue.  The
government still reaps the benefit of royalty and tax revenues which would have
been the envy of any former premier.  
Oil is trading at 115 $/barrel, well above historical pricing.  Make no mistake this is a spending issue.

“So, instead of accepting the blame for their own
mismanagement, the Premier is fingering commodity prices, previous governments,
and the Opposition.   
By not putting the blame on herself, and the PC Party,
she is insulting the intelligence of every Newfoundlander and Labradorian.  Her spin is transparent to all who make the effort to look“.
“Nav, there is hope.  The Premier and her Party have had their heads
in the sand for three years; but, they seem to finally have awakened to the
severity of the situation.  The Province
is looking at a deficit of 12-17% of their annual revenue.  This is as bad as the period from 1920 to
led to the final collapse of the Nation. 
Do you know, Nav, that
Newfoundlanders and Labradorians are the only people,
in history, to
freely give up
their democratic franchise?  This is unimaginable, but it was forced upon
us by the heavy burden of debt.
  The self-imposed
‘holiday from politics’ is a history lesson which should not be forgotten by any modern leader”.

Uncle Gnarley seemed to gaze out the window to the
park out across the street.  He then
continued his narrative:

“One of history’s greatest leaders, Sir Winston
Churchill, said that, ‘He was not a lion, but was expected to make a lions
call’.  I am sure that Dunderdale never
thought that she would have to preside over budget cuts as severe as what is
required.  I hope that she is up to the

“I also hope that this will cause the Premier to
reflect on the elephant in the room. 
This $1.6 billion deficit will signal that she needs to personally
challenge the assumptions used by the Department of Finance and Nalcor.  Just as it was careless to increase Government spending by 75% in five years  

so too is it reckless to continue with the Muskrat Falls Project, as it
is currently envisioned.    She has to
challenge the experts as the failure of a project, the size of Muskrat Falls,
will mark her epitaph”.

But, Uncle Gnarley, I suggested, she is not
an engineer, nor an economist.  She has
to depend on the experts to provide guidance on a project as complex as Muskrat
Falls.  You, yourself, often struggle to
understand the economics.

“Nav, one of the world’s most noted economists,
John Galbraith, had a saying that when government’s rob Peter to pay Paul, they
can always count on the support of Paul. 
Well, the Premier is certainly smart enough to recognize that, in this
analogy, Nalcor is Paul. 

The Premier needs to step back and evaluate the basics
on the Muskrat file.    Even the most
complex engineering and economic subjects can be effectively understood and
communicated in simple terms.  Muskrat
Falls is no different”.   

With that Uncle Gnarley took the sketchpad he brought
into the restaurant.  The old economist
began to write down some simple calculations:

                                              Equity Borrowed  
$1.5 billion

                                              Debt Borrowed      $6.4 billion

                                              Total Debt              $7.9 billion.

                                              Interest Rate   

                                              Annual Interest Cost Only:  0.05 x $7.9 billion = $395 million


                                             Total Possible Energy  
4900 GWhr

                                             Nova Scotia Block  
1000 GWhr

                                             Energy for Sale  
3900  GWhr


                                             Market Rate     
50 $/MWhr

                                             Emera Transmission Fee    10 $/MWhr

                                             Final Market Sales Rate    40 $/MWhr


                                            Total Revenue:   
3900 GWhr x 40 $/MWhr = $195 million

                                             Annual Shortfall: 
$200 Million (interest payment only)

 “You see, Nav, despite the rhetoric, the only way
this project is happening is that it is being paid for by Newfoundlanders and
Labradorians.  Actually, under Bill 61,
the low electricity rates enjoyed by Labradorians will remain unchanged.  The Project is being paid for by the island
consumers only.  We will be paying over
200 $/MWhr for Muskrat Falls energy, which is about 4 times the going

“This is before cost over-runs, or unknowns such as
uncertain soil conditions come to fruition.  It truly is Muskrat
Madness which has afflicted this government”.

With the numbers so plainly presented, in front of me,
I knew that the old economist was not ‘all wet’.  Still, I do have some faith in the
professionals at Nalcor. 

Uncle Gnarley, you are, once again, forgetting
that continuing to burn oil at Holyrood, as an isolated island source, will
even be more expensive to islanders. 

“Nav… an interesting thought; but, this is where the
Premier needs to use her common sense. 
Currently, we are spending about $130 million a year for oil at
Holyrood.  Why would we spend $395
million, in interest alone, to save an expenditure of $130 million in oil?

“Would it not make better sense to acknowledge the
merit in our modest proposal; that is, build the link to Labrador now and build
the dam later, when the demand or US prices warrant the investment?

“Nav… not only is it a lower risk, but the proposal also potentially represents a lower overall cost.

“In this economic paradox of a booming economy, but a
crippling deficit, I see no good reason to not implement a phased

It was true; the merit of the staged project
development was clearly obvious, even to the uneducated.  It was clear that it would de-risk the
project, allow the remaining technical issues to be resolved and permit the
workers on Hebron, the Wellhead platform and Vale, to transition into the Lower
Churchill Project.  This strategy, alone,
would help provide long term sustainable construction jobs in the Province. 

Gnarley, it is clear that this is, indeed, a
face saving measure for the Premier; but, it is also a better option for all
tax payers.  Do you think the Premier
will give it due consideration?

“Nav, I have faith that any leader, who faces the
dire financial situation in which the Province finds itself, will look at all
available options.  I hope that
Dunderdale examines this objectively. 
The adaptation of our modest proposal does not represent failure.  It is adjusting the strategy for an ever
changing world.  It would be smart
leadership, and one if properly explained to the people of the province would
be embraced.”

With this, I thought of another quote from the famous
economist John Galbraith.

All of the great leaders have had one characteristic in common: it was
the willingness to confront unequivocally the major anxiety of their people in
their time. This, and not much else, is the essence of leadership.

With these words, both Uncle Gnarley and I finished
our drinks.

 It is clear that the mood of the electorate is changing.  
People are both frustrated and concerned that, in this white hot
economy, a government with the financial means like no other in our history can
mismanage the books to extent which apparently has the PC government.  I only hope that my old friend was incorrect
in assessing the Premier’s character flaw. 
Hopefully, Premier Dunderdale will acknowledge what is blatantly obvious
to all us ‘Peters’.  It may be the right Project;
but, is it the right time? 

Uncle Gnarley abruptly interrupted my thoughts as he
got up from the table.

“I am heading to the library.  With all this reference to John Galbraith I
remember one of the first books on economics I read almost 40 years ago.  The New Industrial State 
perhaps essential reading once again. 

“Nav… I have one departing word on leadership, which you can
take back to your professor:  Great
leaders tend to be students of history”.

Editor’s Note: This Post was written by “JM”, the anonymous reseacher, writer
presenter, to the PUB and in local Blogs, on the Muskrat Falls Project.
JM has written a
number of Uncle Gnarley pieces, including, most
recently, Gnarley’s Theory of Political Devolution and The Great Revolutionary from the Shore
. His latest Paper is entitled: Muskrat Falls Revenue Stream: Fact or Fiction  – Des Sullivan


Bill left public life shortly after the signing of the Atlantic Accord and became a member of the Court of Appeal until his retirement in 2003. During his time on the court he was involved in a number of successful appeals which overturned wrongful convictions, for which he was recognized by Innocence Canada. Bill had a special place in his heart for the underdog.

Churchill Falls Explainer (Coles Notes version)

If CFLCo is required to maximize its profit, then CFLCo should sell its electricity to the highest bidder(s) on the most advantageous terms available.


This is the most important set of negotiations we have engaged in since the Atlantic Accord and Hibernia. Despite being a small jurisdiction we proved to be smart and nimble enough to negotiate good deals on both. They have stood the test of time and have resulted in billions of dollars in royalties and created an industry which represents over a quarter of our economy. Will we prove to be smart and nimble enough to do the same with the Upper Churchill?


  1. I fail to see the point of building a link to the Island, except in the context of possibly bringing power from the Upper Churchill to our shores. Even then, the costs would be prohibitive.

    Should consideration be given to building a tunnel with road or rail access to Labrador, the whole economics of it MAY make sense. I don't presume to know the economics of building a tunnel but it would, by necessity require federal involvement, as well as that of Quebec. By that, I mean that the feds could support a regional project that would see a decent road connection through Labrador all the way into Quebec City.

    Such a project would need to be viewed in the context of scaling back on the ferry operations and determining how much cheaper it would be to provide a road link, if at all. Time would definitely be saved by doing so and one would hope that significant cost savings would result, but I am no economist.

    As for Muskrat Falls, it is a failed and deeply-flawed Danny Williams scheme, conceived out of nationalistic tendencies that will do incredible damage to our economy, merely to assuage someone's ego.

    Sadly for the Premier, she will take the fall for Williams' folly. Is it stubbornness, stupidity, or willful blindness? Whatever the reason, we are going to be the victims of their madness. Unless, reason trumps expediency in the next year, it will have passed the point of no return and we will be severely hampered for decades.

    Finally, I see all kinds of potential pitfalls and obstacles that could drive the costs ever higher, thus ensuring that we are dragged ever more deeply into this economic quagmire.

  2. In Sept Uncle Gnarley said his 'link only' proposal had caveats including an independent review of the forecast power needs( that Nalcor's demand forecast was high). I have proposed the demand is also subject to more cost effective efficient heating options, so even the link seems unnecessary.
    I originall mistook Uncle Gnarley as a creation of Ray Guy. I now read Guy's final piece, published in the Northeast Avalon Times. I guess in reference to a recent Telegram photo of our Premier, he says "Before Christmas, Dunderdale was twirling around in her little muskrat slippers: now she sometimes looks like a Beothic caught in the headlights. Up to her bumpers in bog" Not sure if this was before or after Cabot Martins expose' of the North Spur problem. In his last piece, reflecting on his career, he says 'So I have settles Hitler's hash, defrosted the Cold war, and pensioned Joe Smallwood. "Come Robin, our work here is done". It seems this bog (mud) problem may do Cathy in, if the extra cost will be the last straw. If so, then the question is how long and how much more money will be 'invested' on MF for subbornness? Winston Adams