OVI WHY WILLIAMS WALKED, PR NC E E WHY MARTIN BALKED: H S T THE ATLANTIC ACCORD NFLD & LABRADOR DISPUTE IN PERSPECTIVE L E S S E Christopher Dunn P C ROVIN

In a province where no premier ever lost votes by standing up to Ottawa, Danny Williams has become the latest in a long line of provincialist champions from and Labrador. When he walked out of a First Ministers’ Meeting last October, he had carefully chosen his fight with over the Atlantic Accord, which allows Newfoundland and Labrador to keep 100 percent of its offshore revenues. Yet 70 percent of those revenues are clawed back by Ottawa under the equalization formula. In the election campaign, both and promised to end the clawback. Martin made a similar campaign promise, but balked when federal finance officials turned stingy. From St. John’s, Christopher Dunn appraises the political landscape, and fallout, from the Atlantic Accord disaccord, and finds Martin between the Rock and a hard place.

Dans une province où aucun premier ministre n’a jamais perdu le moindre vote en défiant Ottawa, Danny Williams est le tout dernier d’une longue liste de champions provinciaux. En claquant la porte de la rencontre des premiers ministres en octobre dernier, il a soigneusement choisi son combat contre Paul Martin, l’Accord atlantique qui prévoit que Terre-Neuve-et-Labrador conserve la totalité de ses revenus extracôtiers. Or, 70 p. 100 de ces revenus sont récupérés par Ottawa suivant l’actuelle formule de péréquation. En campagne électorale, tant Stephen Harper que Jack Layton ont promis de mettre fin à cette situation. Paul Martin avait fait une promesse analogue, pour finalement reculer sur les conseils de ses responsables financiers. Depuis St. John’s, Christopher Dunn évalue les répercussions politiques du désaccord sur l’Accord atlantique, de même que l’ampleur du dilemme auquel est confronté le Premier ministre canadien.

Prime Minister Martin: “You can’t walk out of this meeting.” made to the province’s electors during the 2004 federal elec- Premier Williams: “Just watch me.” tion. Williams was annoyed by an October 24 letter from Finance Minister Goodale which qualified the federal offer o began, last October 26, another of the periodic polit- by limiting it to eight years (2004-2012) and provided that ical dramas that convulse the province of “no such additional payments result in the fiscal capacity of S Newfoundland and Labrador and the Ottawa estab- the province exceeding that of the province of Ontario in lishment. This time it involved the premier’s proposal that any given year.” Coincidentally, Goodale had redefined the there be a new offset provision in the Atlantic Accord allow- province’s fiscal capacity with “top-ups” that the province ing Newfoundland and Labrador to retain 100 percent of found unacceptable. Failing to meet with Martin before the the benefit of the offshore petroleum revenues it receives, FMM, Williams turned on his heel and left the capital. notwithstanding the treatment of those revenues under the Then he did it again: different capital, different offer, same equalization program, which provided that 70 percent of walk. Meeting in Winnipeg on December 22 with Mr. Goodale, these revenues be clawed back to the federal treasury. Mr. Williams said that the new federal offer was even worse The premier had set an October 26 deadline, the date of and that the province was breaking off negotiations with the the First Ministers’ Meeting (FMM) on equalization, for the federal government altogether. The province said that the prime minister to honour a pledge to that effect that he had prime minister had reiterated the principle that the annual off-

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set payment should be equal to 100 per- Then what slippage in support affect- Small provinces have to master politi- cent of any reductions in equalization ing the premier was swept away by an cal theatre if they want to be heard. payments resulting from offshore rev- intemperate, prejudiced column on Far from aberrational, his behav- enues, but had added conditions which January 6 by Margaret Wente of The iour was perfectly rational; in fact, eroded the 100 percent commitment. Globe and Mail (rural Newfoundland Williams had no choice. His actions Among the most striking, later pub- was “probably the most scenic welfare were driven by the appalling state of licized by the province, were those that ghetto in the world”). Outrage fol- provincial finances, a nationalist con- stated that the federally proposed offset lowed. The premier’s support was once sensus and a federal consensus. arrangement would terminate in any again consolidated, by default, riding a Danny Williams was sworn in on year in which NL is off equalization; the wave of nationalist feeling. He wisely November 6, 2003 as the ninth premier federal transition mechanism which is raised the flags during this episode. of Newfoundland and Labrador. The Williams cabinet, hours into Walkouts and bluster are old hat in this province. There was its first meeting, made a deci- flailing on Term 29, sion to undertake a challenging over offshore third-party review of the jurisdiction, interjecting his concerns about province’s financial situa- tion. The PricewaterhouseC- Meech Lake in the unlikely context of a First Ministers’ oopers review results were Conference on the economy. All were, in their way, effective announced in a State of the — ultimately. Small provinces have to master political theatre Province address broadcast if they want to be heard. on January 5, 2004. The review pegged the current- triggered when the new offset termi- In a January 14 letter, the prime year deficit, on an accrual basis, at nates is the inadequate one embedded minister, apparently reversing a stance $827.2 million (up from the Liberals’ in the existing Atlantic Accord; there that Goodale was the point on this file, $666 million). It also noted that in the would be no extension of the agreement agreed to talks. January 28 was to be the absence of restraint measures, (1) the for another eight years to 2020 if the new date for “PM to premier” discus- average deficit would exceed $1 billion province was off equalization in year sions. However, the letter hinted he annually for the next four fiscal years seven or eight, or if there was no bal- would be unbending on extending an (2004-05 to 2007-08); and (2) the debt of anced budget in year eight, or if the agreement past 2020 and making “addi- the province would increase to $15.8 bil- province’s debt/GDP ratio moves ahead tional and continuing 100 percent offset lion from $11.6 billion by 2007-08. of one other province. payments even if the province no An audit of the financial state- Even if an extension did occur, the longer qualifies for Equalization,” which ments of the province for the year end- same criteria (two years off equalization, he called “in practice indistinguishable ing March 31, 2004, in fact saw the improved debt/GDP ratio, failure to bal- from Equalization payments.” government record a deficit of $913.6 ance budget) could end the arrange- million — the highest ever reported by ment in any year, and there was no hat can explain this apparently the province — and a net debt of $11.5 chance of extension beyond year six- W aberrant behaviour? Shortly billion. The auditor general also noted teen. The revenues from other potential after the October walk, I was at an aca- that interest costs amounted to $1.1 new oil fields will not be included. demic conference in Ottawa and was billion or 25.4 percent of total revenue To emphasize the province’s case, asked, by more than one person there, in that year — the highest interest costs the next day Williams ordered that if the premier was unsteady. The poor as a percentage of total revenue of any Canadian flags be lowered from dears. After all this time, they still don’t province in . The unfunded provincial government buildings. get Newfoundland politics. Hence, yet pension liability at $3.75 billion con- They would stay down for close to another screed on the subject. tinued to worry government. three weeks. During this time, provin- Walkouts and bluster are old hat The effects of this appalling finan- cial public opinion careened wildly. in this province. There was Joey cial state of affairs had, and are still Originally united behind the premier Smallwood flailing John Diefenbaker having, repercussions. Nineteen on the offset issue, it began to divide on Term 29, Brian Peckford challeng- departments became 14 in February on the “flag flap.” Sensing that the flag ing Pierre Trudeau over offshore juris- 2004, and 10 departments were restruc- tactic was threatening the offset strate- diction, Clyde Wells interjecting his tured. In a January 2004 State of the gy, on January 3 Williams indicated his concerns about Meech Lake in the Province address, Williams announced openness to further talks with Martin unlikely context of a First Ministers’ there would be “a change in the pro- (and emphatically not Goodale), who Conference on the economy. All were, grams that are offered and a change in then retorted in effect no flag, no talks. in their way, effective — ultimately. the size of government.” As many as

10 OPTIONS POLITIQUES FÉVRIER 2005 Why Williams walked, why Martin balked

CP Photo The giant offshore drilling rig, 600,000 tonnes and 224 metres tall, being towed from Trinity Bay to the Grand Banks in 1997. For a province drowning in a sea of deficit and debt, offshore revenues promise hope of financial rescue. But ownership of the resource is also symbolic. “There is,” writes Christopher Dunn, “a profound sense of resources as both patrimony and potential.”

4000 positions in the public service seen the province relinquish $3 billion provincial history. The province’s experi- have been targeted for elimination. in clawed-back revenue over the next ence has taught it that the federal However, the state of provincial eight years. Privately, Sullivan talks authorities are insincere partners to have finances is such that even achieving about figures like $4.5 billion over when vast financial or resource issues are “efficiencies” in public services will fall eight years and $6.5 billion over 21 at stake. It is telling that in his first far short of the mark. A radical revenue years accruing to the province if it gets speech to the people of the province infusion, or a series of them, is necessary. a deal it considers just, and the dollar upon his return from Ottawa, Williams A new Atlantic Accord deal would be a and oil revenues remain steady. Yet made reference to one of them, namely critical first step. In this light the pre- extra money would not go just to debt Churchill Falls. But there are others. mier’s actions are not aberrant, but total- reduction, Sullivan notes: there would Term 29: Term 29 was a one of the ly rational. Goodale had, after all, been be a balanced approach — some for the Terms of Union that governed bandying around pitiable offers like $1.4 debt, but much for needed infrastruc- Newfoundland’s joining Canada, and billion over eight years. This just isn’t on. ture, like ferries, hospitals and schools. was inserted in light of the difficulty of The province has never made pub- predicting the financial consequences of lic a detailed analysis of what a new, here is a nationalist consensus on provincehood. It was an early precursor better deal could mean in terms of rev- T resource and financial issues in of equalization, which in fact later ren- enues: estimates, yes, but the ration- Newfoundland and Labrador. New gen- dered it redundant, but its intent was to ales, no. However, we have some ideas erations carry the same historical mem- allow the province to provide public serv- of what orders of magnitude are ories, and grievances, as their elders. ices at the level and standard of those involved. In a (St-John’s) Telegram arti- Such issues are immediately put in prevailing in the Maritime provinces, cle interview last October 26, Finance context in this province. There is a pro- keeping in mind the province’s ability to Minister noted that if found sense of resources as both patri- pay. The federal McNair Royal oil revenues remained healthy, mony and potential, and so the Atlantic Commission which was mandated to Ottawa’s proposal (with the Ontario Accord and its fate are part of the larger recommend a level of transition grant, cap, since bargained out) would have and more complex warp and woof of suggested in 1958 an amount rising to $8

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million annually by 1962, thereafter to province is about 10 percent lower than ed that “While Hydro- has gath- remain in perpetuity. Two issues sur- it was in 1991. The collapse of the fish- ered an estimated $23.8 billion in rev- faced: the amount was well short of the ery was a social and ecological phenom- enues from the sale of electricity since the $15 million a 1953 Newfoundland Royal enon that cannot be attributed to a Upper Churchill came on stream in 1972, Commission had said Newfoundland particular government or factor. Newfoundland and Labrador has taken required to meet the objectives of Term Nevertheless, as the province’s Young in less than three percent of that — about 29, and Prime Minister Diefenbaker Royal Commission reported in 2003, $680 million.” There is a moral impera- decided the grants should end in 1962. “the fact remains that this environmen- tive for federal authorities to atone for There is a nationalist consensus on resource and financial their lack of assistance in the Upper Churchill case by issues in Newfoundland and Labrador. New generations carry offering financial backing to the same historical memories, and grievances, as their elders. develop the Lower Churchill There is a profound sense of resources as both patrimony and at the Gull Island or Muskrat potential, and so the Atlantic Accord and its fate are part of Falls sites. For three decades they have not. the larger and more complex warp and woof of provincial Equalization: There have history. The province’s experience has taught it that the been a number of adjustments federal authorities are insincere partners to have when vast over the years that Newfound- financial or resource issues are at stake. land claims has affected its bottom line. In 1982 the fed- The fact that Diefenbaker extended the tal, social and economic tragedy eral government included non-renewable payments in 1961 for another five years, occurred on the federal government’s natural resources in the calculation of fis- and that the succeeding Pearson Liberal watch and as a result of its failure to cal capacity, but removed Alberta’s non- government honoured the claim for the manage the resource properly.” renewable natural resources by going to a full amount, and in perpetuity, put the The Churchill Falls Development: The five-province standard. In order to prevent issue to rest. However, it had shown the Churchill Falls Development is an enor- a situation where Newfoundland and new province that its claim had justice, mous hydroelectric resource located in Nova Scotia would face no net increase in that it had to struggle in the federation the province; but the principal benefici- revenues due to this new method of cal- for what it got, and that a constitutional ary by far is Quebec, to the tune of about culation, there were, over time, two guarantee was no automatic guarantee of $850 million a year. This anomalous options provided. equitable treatment. result profoundly disturbs the people of To operate outside of the equaliza- The fishery: The principle jurisdic- Newfoundland and Labrador. Size mat- tion program: a series of declining tion over the groundfish fishery is feder- tered, but manifestly should not have. “offset payments” provided al, under s. 91(12), but there is a The federal government was plainly not through the Canada-Newfound- provincial regulatory role under the sympathetic to a small province that land Atlantic Accord of 1985 (and a property and civil rights clause s. 92(13). could deliver few seats in Parliament, and Nova Scotia arrangement in 1986) In 1992, the federal minister of Fisheries preoccupied with a large province that and to kick in for a 12-year period and Oceans placed a moratorium on could. As the Young Commission noted, once an oil production trigger was groundfish stocks in , “The federal government placed Hydro- reached, now effectively 1999-2000 especially in those adjacent to Quebec in a monopolistic position dur- to 2011-2012. Newfoundland and Labrador. The fish- ing the Churchill Falls negotiations of To operate within the equalization ery has not rebounded as quickly as the 1960s by not enacting legislation that program: the “generic solution” expected, and there are continuing would have allowed for a power corridor introduced by the new Chretien moratoria on key groundfish stocks in through Quebec. Without such federal government in 1994, which shields some areas (species like cod, American legislation, negotiations on the Churchill 30 percent of a province’s revenue plaice, witch flounder, redfish, haddock). Falls project took place in a situation in from the calculation of its fiscal The average annual landing of ground- which virtually all the power and energy capacity if that province has 70 per- fish in 2003 was 10 percent what the had to be sold to Hydro-Quebec.” And it cent or more of a single revenue average landing was from 1977 to 1991. was to be sold at rates from the 1960s and source, thus limiting the decline in As a result, some fish plants have had to for 65 years, without an escalator clause, equalization somewhat. (Newfound- shut permanently, or reduce their work- which proved to be fatal when in the land’s offshore oil resources are a loads, or turn to other species. Troubles international energy crisis hit in the unique source in the equalization in the fishery contributed to the contin- 1970s and Hydro-Quebec enjoyed wind- formula so, by definition, New- uing depopulation of rural fall profits. The Independent, a weekly foundland has 100 percent, and the Newfoundland; the population of the newspaper in St. John’s, recently estimat- generic solution applies.)

12 OPTIONS POLITIQUES FÉVRIER 2005 Why Williams walked, why Martin balked

Neither of these two options is such as oil and gas are among the most shore, consistent with a strong and unit- entirely satisfactory. The Accord does- promising avenues for real growth in ed Canada,” and stated that “New- n't provide offset provisions (revenue Atlantic Canada..... When the federal foundland would be entitled to protection) for a long enough period; government taxes [offshore oil and gas] establish and collect resource revenues the offsets decline over that limited revenues away by 70 cents to a dollar, as if these resources were on land.” time; and the Accord doesn't opera- however, they jeopardize the opportu- All in all, the weight of promises tionalize the meaning of principal nity to establish longer term growth.” and policies was in the direction of a beneficiary. As for the generic solu- His solution was to remove non-renew- substantial federal consensus. Why did tion, it can protect no more than 30 able resources from equalization to Martin hesitate? percent of revenues and it can be allow the Atlantic provinces to benefit reduced or eliminated at federal gov- from these revenues, a ten province artin balked because he became ernment discretion. standard for equalization, with a M aware that the Accord issue was The province has to choose one or phase-in ensuring that no recipient awash in repercussions and implica- the other. Because the Atlantic Accord province would receive less money dur- tions. The Martin stance was now gov- offsets would decrease in importance ing the transition to the new formula erned by Finance’s fears that side deals over the decade, and because the equal- than the current formula provides. could weaken the integrity of the ization program has no “Newfoundland Earlier, in an April 25 letter to national equalization program, by as ‘principal beneficiary’ ” language to it, Premier Williams, Layton promised NDP departmental fears over the change in as the Accord did, the solution was to support for “Newfoundland and Labrador the economic paradigm governing amend the Atlantic Accord. receiving 100 percent of its offshore oil Atlantic Canada, and by the same fear of and gas revenues to make it the ‘principal losing windfall petroleum profits that arly in 2004, Premier Williams began beneficiary’ of these resources based on galvanized the Trudeau government in E discussions with the feds designed to the principles set forth in the Atlantic the 1980s. Plus, the future electoral ram- achieve what he called “100 percent of Accord.” He also said Newfoundland and ifications have to be sussed out. our offshore revenues” outside of the Labrador should have an ownership stake Imperial Finance, as the federal equalization program. This would be in offshore oil and gas developments as central agency is known in Ottawa, achieved by changing the equalization equity partners, that an ownership stake doesn’t buy the asymmetrical reasoning offset provisions of the Atlantic Accord to would be a pre-condition to all future that lay behind the Atlantic Accord. “provide a payment equal to 100 percent developments, and that the government How many other provinces will have of the net direct provincial offshore rev- of Canada should transfer its 8.5 percent the right to claim side deals? Over enue,” such net direct revenue defined as equity share of the Hibernia project to the which resources? The feds’ delay in “Royalties and Corporate Income Tax province. resolving this is because of a battle over which is generated in the NL offshore It wasn’t as if promising Newfound- Finance’s hegemony and its preference area, less the Equalization clawback (cur- land it would be the major beneficiary for standard principles, regardless of rently at 70 percent).” In June, when in from offshore energy was something what effect they have in the particular. Newfoundland, Martin stated that he new, either. Past leaders had seen the The economy fragment of the feder- had accepted the premier’s proposal. (For need to correct a resource anomaly and al bureaucracy has an image of Atlantic a review of the wording, go to CBC News: fiscal problem at the same time. In Canada that is something like that of http://www.cbc.ca/story/canada/nation- 1979, the Clark minority Progressive Michael Bliss’s “Old Canada” — the old al/2004/06/05/offshore040605.html). Conservative government even prom- economy, subsidy-gobbling east — jux- One can see that the Accord issue, ised to transfer ownership and jurisdic- taposed uncomfortably alongside “New when woven into the cloth of tion of offshore mineral rights to coastal Canada,” the more entrepreneurial, new Newfoundland discontents, takes on a provinces. In a September 1982 offshore economy, cluster-oriented centre and weighty baggage of grievance. revenue proposal, Trudeau stated that west of the country. It can be led out of “Newfoundland should enjoy the major this policy wilderness (witness the till another reason that Williams share of the revenue that offshore anomalous Atlantic Innovation Pro- S walked is because he could. It was a resources are expected to generate,” gram) but the leadership is seen as, sur- low-risk tactic. Conservative leader until the province reached a level of fis- prise, federal. If the autarkic implications Stephen Harper and the NDP’s Jack cal and economic capacity well above of the Accord are translated into provin- Layton had promised deals that made the national average. The Mulroney- cial-led economic development, a Liberal inaction on the clawback seem Peckford MOU of June 14, 1984, which national presence, federal jobs, and Lib- definitely trifling. preceded the Atlantic Accord, recog- eral seats are in jeopardy. Last May, during a swing through nized “the right of Newfoundland and Petroleum politics bring out the law Newfoundland in the federal election, Labrador to be the principal beneficiary of the jungle in Canadian federalism. Harper said “non-renewable resources of the wealth of the oil and gas off its There are, in effect, none of the genteel

POLICY OPTIONS 13 FEBRUARY 2005 Christopher Dunn

rules that govern other aspects of inter- Conservative Party since its founding in Newfoundland and Labrador should be governmental relations. It is survival of October 2003, and has the added advan- the principal beneficiary of offshore the fittest. Ottawa reacted to the wind- tage of appealing to the Atlantic rump petroleum resources has been violated fall profits of the 1970s petroleum era of former PC MPs and voters. Plus, at by the feds getting the lion’s share of with a series of revenue grabs. When the next election, doubtless the point these revenues (86/14 percent, accord- Alberta didn’t like the NEP, it demanded will be that the Atlantic Accord was ing to the Williams government, 75- and got a tax regime that saw its share made by federal and provincial 80/20-25 percent says the Young Royal increase. What didn’t emerge however Conservative governments. Commission report), and the existing was a principle of sharing. That was to It also fits in with Harper’s coalition- offset payments in the accord declining be determined by power politics. Oil building nature and reveals his under- before the offshore yields its maximum prices rose at one point to $55 a barrel. standing of what it takes for a benefits. Plus, non-renewable resources Martin had to reassess a promise made right-of-centre party to achieve electoral deserve special treatment. The province when they were half that amount earli- success in Canada. Political Scientists has never strayed from these con- er in the year. Eric Belanger and Jean-Francois Godbout tentions, while Ottawa modified its have argued that since the 1980s, federal negotiating stance many times, to the et the effects of this issue are even party competition in Canada has extent that its philosophic point of ref- Y wider than perhaps Martin imag- revolved around two policy dimensions, erence is indistinguishable. One knows ines. This is a big deal. All sorts of economic (left/right) and regional (cen- however that it is driven by the dictates issues are in play. tralization/decentralization). of petroleum politics. 1. The offshore oil patch is expanding. The Liberals have ruled for decades The $6-billion Hibernia project had start- by occupying the political centre on the he irony of the provincial stance ed producing oil in 1997 and the $3-bil- economic dimension. Opposition par- T however is that it has never revealed lion Terra Nova project began production ties have two options: wait (usually for the calculations behind the revenue in January of 2002. In March of 2002, the a long time) for the ruling party to shares. In a sense, it doesn’t have to. province’s third major offshore energy stumble on the economic dimension, Williams said that he was watching the project began when Husky Energy or try to find a faster way: say, a region- federal election based on this one issue. announced the go-ahead on the $2.3-bil- al issue that creates alternative electoral He waited. The Conservatives and New lion White Rose offshore oil develop- cleavages and coincidentally deflects Democrats responded promptly, as ment, and production is forecast to start attention away from a right of centre wished. The Liberals responded at the in late 2005 or early 2006. But there may economic stance. eleventh hour, dictated to by a provin- be more on the way. Husky Energy has cial premier, who said Newfoundlanders announced its intention to drill one off- hus the Atlantic Accord issue fits the should vote only for those who support- shore exploration well in the South T bill: it applies to two of the four ed his stance. Then Williams focused the Whale Basin in 2004. The provincial Atlantic provinces and responds to an province’s attention on this issue for the finance department estimates that historic sense of grievance in the east. It next half-year. Then he artfully contin- Newfoundland and Labrador could see as provides a potential area for new region- ued to make this a matter of federal- many as 10 wells drilled over the next al alliances: West meets East, and the provincial summitry by bombing the several years. The implications for federal twain mix. It is also telling that we bridges under Minister Goodale and and provincial revenues are important. haven’t seen Atlantic Canada’s “culture Regional Minister John Efford, and The new offset provisions Williams is of defeatism” rap successfully pinned on manipulating the flag issue to smoke out proposing would continue “over the life Harper since he was seized of the Accord Martin as the principal federal inter- of the offshore petroleum production.” issue. All the things that should make locuter. The Liberals are like a deer 2. The Atlantic Accord has the poten- him scary (at least in Liberal eyes) — he caught in the headlights. tial to be a wedge issue. Atlantic Canada is was a disciple of Hayek, a policy advisor Given the nature of petroleum pol- one of the legs of the three-legged stool to Preston Manning, a soul-mate of Tom itics, it is likely that there will be a saw- of Liberal electoral success (Ontario and Flanagan, an ex-president of the National off, with Newfoundland getting not all, Quebec of course being the others); in Citizen’s Coalition, a co-author of the but at least substantially more than it is the 2004 election it even yielded more “Firewall Letter” — don’t, particularly. now being offered. Given the financial seats for the Liberals than did Quebec. 3. This Accord episode shows how to straits in which it now finds itself, and Stephen Harper sees the Accord issue as frame an issue. The Liberals have lost the federal resource record so far, this one that could achieve two of his long- control of the Atlantic Accord issue, and can only be for the best. standing aims: to wean the eastern the Newfoundland Tories own it, at least provinces off the Liberals, and off equal- for the present. The Newfoundland case Christopher Dunn is a professor of politi- ization dependency, simultaneously. It is premised on a few by now well- cal science at Memorial University in is the first regional issue to face the new known contentions. The principle that St. John’s. [email protected]

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