THE Haunted Hills are in the middle of the Latrobe Valley, between Moe and Morwell. Stand on a slope on the eastern edge of the hills and the naked eye sees a vast hole — the Yallourn open-cut coalmine — beside green paddocks in the foreground, the brutal beauty of power station cooling towers in the middle distance, blue ranges on the horizon.

The empty hillside was once a town called Hernes Oak. It now exists only in the memories of those who lived there. A bitumen road leading nowhere meanders through a ghost town of empty blocks. Weeds creep over rubble where houses stood. Barbed wire cuts across phantom driveways. A few sheep roam abandoned gardens, still marked by stubborn clumps of bulbs and shrubs, growing wild.

Over the road, where the immense open-cut mine now yawns, huge crowds gathered in 1954 to see the young Queen Elizabeth visit the Yallourn power station, then an industrial showpiece of the British Commonwealth. In 1955, the touring MCC team played for three days on one of the manicured ovals bordering the town. In 1956, 13,000 people turned up to see international athletes stage a mini-Olympics.

Then, people flocked to the valley. After the war migrants helped build what was, briefly, perhaps almost the "workers' paradise" that had eluded totalitarian states many refugees had left behind in Europe. The town had no privately-owned property but it had the biggest cinema outside Melbourne, a square bordered with churches, and sports grounds, halls and clubs, even a rowing course.

None of this would have surprised Sir John Monash. An engineer and perhaps the greatest Allied general of World War I, Monash returned from battle to lead a peacetime campaign: to drive the new State Electricity Commission, set up in 1916. He carved the future out of the bush at a place later named by combining Aboriginal words for brown ("yalleen") and fire ("lourn"). It seemed better than the existing name of Brown Coal Mine.

One David Ryan had first discovered brown coal near the Latrobe River in 1873 but it wasn't until bricklayer-turned-publican Henry Godrich publicised the find in 1879 that mining started. It continued fitfully, interrupted by fires and lack of capital, until Monash brought military precision and government backing in 1921.

From the grand double-storey commission headquarters built at Yallourn, with its Greek columns, Monash laid his plans. The general's organisational genius flowed down his chain of command to create the very model of a modern power generation plant — and a model garden city. The boast that diggers would return to a "land fit for heroes" was crushed by the failures of soldier settlement schemes elsewhere. But, in Yallourn, at least Monash built a town fit for humans.

Monash died in 1931 and didn't see his creation in full flower. But for another 30 years, his vision bloomed into a grubby utopia for "labourers of coal", where full employment, good wages and pre-fabricated commission houses made life easier than it had been for some survivors of depression and war. But there were drawbacks — some obvious, some insidious.

Coal dust settled on everything. On the roof and in the ceiling. On washing on the line. Locals talked of "the Yallourn squint", referring to how they walked around with eyes half closed against the dust from the mine and the "fly ash" from huge smoke stacks.

The dust, of course, also settled on lungs. But it was not as bad as the tiny asbestos fibres that would lead to deadly diseases such as mesothelioma and asbestosis. Everyone ignored it then, even if some doctors were uneasy, but the asbestos used in the power plants as fireproof insulation would prove a silent killer in coming decades. There would come a time, in the 1980s, when the valley towns had streets of widows whose men had died too young.

This was the flipside of full employment and cradle-to-grave job security. By the time workers realised that an SEC job might be a drawn-out death sentence for many, Monash's vision had already been shattered. As early as 1961 a new regime decided the commission should not be a landlord, and started dismantling Yallourn to mine the coal underneath. There is plenty of coal elsewhere, but it suited management to demolish the town Sir Jack built.

By 1981 more than 600 houses had been trucked away, and the rest were demolished. Now, only the tiny township of Yallourn North survives, near the brooding cooling towers of Yallourn W power station. There is one other thing: the old commission headquarters. Its fate is a metaphor for the SEC's passing. Straddled by power pylons, the once-regal building is an incongruous relic of a different age. Its latest incarnation is as the "Powerhouse Hotel" but there have been others. After the SEC sold it cheaply in 1995 it has variously been a weekend market, a nightclub — even a brothel. Now, it's on the market again. Who knows? The next buyer could hit the jackpot. Standing in the empty bar it's hard to believe but, just up the valley, there's a boom going on.

SIR Henry Bolte called the Latrobe Valley the "Ruhr of Victoria". The comparison with Germany's industrial heart might have been boastful but it wasn't far-fetched.

The state's longest-serving premier knew about power — electrical and electoral — and maintained that without the electricity generated from the valley's vast brown coal deposits Victoria would be the poor relation of the mainland states. Our dependence on brown coal has not changed in half a century. In fact, with the decline of traditional primary industries, coal-fired electricity is more important than ever.

The Latrobe Valley's power stations produce 85 per cent of the state's supply and it is unlikely that will change any time soon. It's the perceptions that have changed.

When Bolte started his 17-year reign in the 1950s, the then State Electricity Commission's coal mining and power plants were shining symbols of modern industry. Now, though brown coal is still vital, it is the villain of the piece: a pollutant that adds to carbon emission and global warming. We use more of it than ever, but feel guilty about it. Some agitate for change to renewable energy sources: solar, wind and water. Others look to nuclear options.

Long term, cutting brown coal reliance might be desirable, if not inevitable. Short term, the steam-driven turbines at Loy Yang, Hazelwood and Yallourn W will keep on humming. One thing is clear: any sudden move to cut the coal habit, even if technically feasible, would inflict further damage on "the Valley" — already bruised by brutal economic rationalism when the SEC was privatised in the early 1990s. More than 6000 jobs vanished from the SEC alone in 1996 as international companies bought and broke up the huge state enterprise that had been such a source of prosperity and pride a generation earlier. And for every job lost directly, others withered.

Some 10,000 jobs vanished in a few years, about half the breadwinners supporting about 70,000 people in the valley towns of Moe, Morwell and Traralgon. Many left in seach of work. Others, trapped by falling house prices, juggled casual work with welfare benefits. Some survived and thrived, working as contractors for the new order. But the old days, when every family had someone working for the SEC, were gone.

Perceptions that it was a poverty trap for a provincial underclass were highlighted when low-rent housing was used to house welfare dependants — anecdotally, at least, single mothers with unemployed boyfriends. That perception was exaggerated when a sad, sordid crime caught national attention.

It is a safe bet most Australians know more about Jaidyn Leskie than about the economic and environmental importance of the place that produced him.

The short life and ugly death of the little boy became a symbol of all that was mean about the valley.

It was a grisly, real-life soap opera with real bruises and real blood. And every mention of it in the media reflected — or exaggerated — an unfair perception that "the Valley" was an economic and social morass, a place of polluted air and broken homes, broken hearts and broken dreams.

It is a perception that still lingers in the outside world.

The reality is different, as a team of reporters from The Age discovered when they spent last week there.

They found the ghosts of the past being laid to rest — and talked to people with high hopes for the future.

This is their report.

Boom time

IT'S LATE on Tuesday morning and Brett Neilson cruises through Traralgon in a glossy black Range Rover, Santana on the radio and silver Armani shades blocking the glare. He's feeling good.

He raises one finger from the leather steering wheel as a truck load of tradies drive past. Most of them work for him.

Seventeen years ago Neilson, 38, started out as a "chippie" with two apprentices and a van. Now 60 people and 300 sub-contractors work for his building company. It turns over $20 million a year and is the biggest of many riding an unprecedented construction boom, spurred by a flurry of government and private spending on new projects in the area. It seems the search for clean coal, holy grail in the crusade against climate change, is behind at least some of it.

Neilson holidays on his 40-foot boat at Hamilton Island, or at his 20-villa resort on the Gippsland Lakes. But nothing lures him away for long.

"People keep saying I'm going to move to Hamilton, but I love it here and I'm here to stay," he says of his home town. New projects in the region include a $750 million coal-drying plant, a $5 billion coal-to-diesel initiative, the Hazelwood power station expansion, the $175 million Gippsland Water Factory and a $250 million upgrade to the Australian Paper pulp mill. Most of these are yet to turn the first sod but locals say confidence is flooding back.

"It's extraordinary, I don't know how long it can go on for but at this stage we believe the next 12 months are going to be the biggest we've ever seen," Neilson says.

The Neilsons have been around the valley for generations and have seen things rise and fall. Brett's father, Norm, recalls the privatisation of the SEC as being like "a tap turning off", with catastrophic job losses dragging the district into a mini-depression. Now, the valley is rising from the ashes, with Traralgon leading the way in a local building bonanza.

On a grassy rise overlooking the Latrobe River flood plain a Mack truck dumps a slew of gravel and rock. The site is just one of seven new estates in Traralgon. At one land sale, 100 blocks were snapped up in three days. About 600 houses have sprung up in the last two years.

Five years ago Brett Neilson built six or seven houses a year, now it's almost 100. Big city outfits — Simonds, Metricon, JG King — have come to town to catch the wave.

Lawns of emerald grass lap salmon pink driveways. Contemporary houses, all sand-blasted steel and straggly young gums, sit alongside the neat iron lacework of faux-Federation suburban palaces.

Real Estate agent Ben Wilson describes the local market as "unbelievable". In five years the average property price has jumped 73 per cent, from $125,600 in 2003 to $216,800 today. Wilson says the value of the average block is going up by $1000 a week. People are moving in from all over Australia, with the population rising about 8 per cent in five years.

"If you scan the paper these days there are five or six pages of jobs. Three years ago there would have been one or two," he says.

The old Manny's fruit market is gone, replaced with a $3.5 million retail and office development. A school block in the centre of town up for tender was snapped up last week for a rumoured $18 million. The first new motel in 25 years is under way. And national and multinational companies such as Dan Murphy's, Harris Scarfe, Safeway and Bunnings are pushing in.

Ben Tyler, 29, was born and bred in the valley. He left to learn winemaking but now he and his pharmacist wife Ebony have returned, lured by the economic renaissance. A sign of boom times is that he has become a builder.

But it's not all about work. The beach and the snow are less than an hours' drive away.

On crisp mornings Ben waterskis on the Hazelwood cooling pond.

"People drive down here and they just see the power stations; they think dirt, pollution, but you have to look beyond the stacks," he says. "Sometimes at work we just stop and marvel — 'where are all these people coming from?' Lots of my friends are trickling back. They've seen the world and now they're ready to settle down somewhere with a future."

"You definitely hear a lot of older people still talk about the old times and how different it was," says Traralgon College student Matt Watt, 15. "I think people are starting to realise that we've moved."

Matt, whose father and grandfather were uprooted when Yallourn was cleared, wants to stick to the area. "I'd probably stay here because it's a nice place. I don't think I would ever move to the city."

Dying out

NOT everyone has a future. Every couple of weeks a retired labourer from one of the old Yallourn power stations walks into Stephen Plunkett's Morwell office knowing he is months from death.

Decades ago, they worked putting up asbestos insulation in the power stations. For too many, the tiny fibres lodged in their lungs, seeds of what would become asbestosis or mesothelioma.

Plunkett, a former partner with personal injury lawyers Slater & Gordon, says the claimants, now mostly in their 70s, get about $250,000 compensation. He says he can mark the progress of the region's power plants by the diminishing number of asbestosis cases they produce. The now-closed Yallourn power stations, along with the nearby briquette factory, were the worst, followed by Hazelwood and the still-operating Yallourn W plant, while the Loy Yang power plants are almost entirely asbestos-free. Now, most of the affected workers are dead.

Plunkett moved from Melbourne as a young lawyer 25 years ago. Much has changed. Like everyone else, he notices the BMWs and Mercedes on the roads and the growing sprawl of houses, some nudging the million-dollar mark.

But with wages struggling to keep up with rocketing property prices, mortgage stress is starting to bite in the valley, much as in the McMansion-belt of outer city suburbs. Mortgage stress — defined as 30 per cent or more of gross household income spent servicing a mortgage — affects three households in 10 in parts of the valley.

Pulp and paper

WHEN the wind is in the wrong quarter, the smell of rotten eggs wafts over Traralgon. It is from Australian Papers pulp and paper mill in nearby Maryvale and it has been around for decades. Locals barely notice it. What some people do notice, and complain about, is the sight and smell of the mill's waste water.

David Evans, Gippsland Waters planning and development manager, concedes that the mixture of industry and domestic waste that flows through the open-channel section of the regional outfall sewer before being treated before is certainly unsightly.

He has fielded complaints from parents saying their children can see and smell the sewer from their school bus on the main road. "They can see this black rubbish sort of flowing through," Evans says.

"You can still pick up the smell in your car from the main road and the channel might be something like 10 or 15 metres away."

The smell, he says, is "basically hydrogen sulphide, a little like a rotten egg gas".

Hydrogen sulphide smells bad, and trees contain a lot of it. Which is why, says David Shirer, a spokesman for Australian Paper, "there's an awful lot of time and effort — and money, quite frankly — spent on reducing odours."

The bad smell might recede when the Gippsland Water Factory is completed late next year. It will eventually treat up to 35 million litres of waste water a day, with up to eight million litres recycled to the paper mill.

The water factory is being built next to a plantation owned by HVP Plantations, Australian Paper's main pulpwood source and the country's largest private plantation.

"Forest is an emotive issue," says Owen Trumper, the company's Gippsland manager, as he drives from his office in Churchill to HVPs Thorpdale plantations south-west of Maryvale. "People feel an ownership of their land. When people see the landscape change, they get emotional."

Trumper comes from a long line of doctors, but felt the lure of forests while growing up in Canada. He worked in forestry there, then New Zealand, before arriving here two years ago with his family.

He drives by plantation after plantation: blue gum, mountain ash and radiata pine. He turns into the spot where Rob Christian and his men are taking a break from harvesting pine planted 20-odd years ago.

HVP plants on demand. If Australian Paper, its biggest client, wants blue gum, HVP plant it. Most of HVPs plantations are still pine — 57,000 hectares of it — and Australian Paper takes all its pine from them. They've been partners a long time and expect to keep it that way. HVP is contracted to supply pulpwood to the company for at least 21 years.

Australian Paper produces the Reflex range of copy paper. Hold a piece of Reflex paper and you hold a piece of Gippsland.

Back near Thorpdale, Trumper says goodbye to the timber cutters and drives down past pine, mountain ash and blue gum plantations. He passes a farm and says he can see himself living there, up near the trees. It's a beautiful spring day and it smells fine.

Coal wars

IT'S early Monday morning and clouds of steam rising from the huge stacks over Loy Yang power station hang in the spring sunshine. The scene below is not so peaceful. Earlier, environmental protesters have broken in and chained themselves to conveyor belts delivering coal to the plant.

Removing them under the eye of cameras is slow work. The protesters' supporters wear orange T-shirts with the slogan "I'm taking real action for climate change" emblazoned across the front.

The action is timed to coincide with the APEC summit in Sydney, and the protesters are demanding an end to coal as an energy source.

Michaela Stubbs, speaking for the protesters, says clean coal use is impossible and demands that Australia invest heavily in renewable energy.

"We need to move away from this reliance on dirty, dirty energy," she says. "The term clean coal is a misnomer; it doesn't exist yet and if it is proven to work it's still too risky. It's still 10 years away and that's just too slow."

These views are not shared by most in the Latrobe Valley, nor by Australia's major political parties.

Senator Chris Evans, Labor's Resources spokesman, says coal is crucial. "The bottom line remains that coal will be at the centre of our energy generation for at least 50 years," he says.

"The future of the coal industry depends on us getting clean coal much cheaper and reducing emissions."

Labor, he says, will put a price on carbon emissions and introduce mandatory renewable energy targets to force power producers to seek cleaner technologies. To tackle climate change "you've actually got to change so that there are positive incentives not to emit at the same level".

For a union official, Tony Maher stands out. With his leather jacket, open-necked shirt and big earring, the national president of the CFMEU seems a little out of place with mining managers in business suits and mine workers in bright overalls and hard hats, as he is at Loy Yang when the protesters turn up.

The difference doesn't end with appearances. Maher calls himself the "most-green" unionist in Australia: he demands carbon tax, support for renewable energy and reforms to reduce coal-energy's carbon emissions. But with the Victorian Government backing its commitment to coal energy, albeit with pledges to make it cleaner, why is a mining and energy unionist calling for changes usually demanded by environmentalists?

Maher says it is a question of principle — an argument that includes the "saving the world for our kids" line. But it is also a question of politics. At the last election, Prime Minister John Howard won the support of Tasmanian forestry workers unnerved by the ALP's timber policy. Maher is determined not to let the same happen with coal, and sells workers the message that "greening coal" will prolong the industry rather than kill it.

"Our choice is either to just sit back and not get involved in the debate and watch others stuff it up or to actually play a part in a consensus and we're doing that," says Maher.

Because there is no realistic option to burning brown coal at present, Latrobe Valley power workers do not feel threatened. After all, given their numbers were virtually halved through privatisation in the 1990s, there are few jobs left to lose.

But Maher says it is important for unions to be good citizens.

"You couldn't get a better example than climate change. If coal-mining companies and power companies put their heads in the sand over climate change — which they did for some years, to be frank — they would find it almost impossible to open new operations … because of the community opposition from protest groups."

He is unimpressed by protesters trying to steal the show and suggests they are too blinkered by ideology to accept that the only way to clean up emissions is to clean up coal, not abandon it altogether.

Right or wrong, the rank and file support him. A group of union members who have waited an hour, greet him eagerly. For them, brown coal is still the colour of money.