During the 1940’s there was a need for hydroelectric power on the north shore of Lake Superior to support the pulpwood, pulp and paper industry. Hays Lake, north of these falls, naturally flowed northward, ultimately to Hudson Bay, and Aguasabon Falls did not exist.

The huge Aguasabon Hydro Development included a series of dams to stop the flow of water from Hays Lake to Hudson Bay and divert most of the water through an underground tunnel to a generating station on the shore of Lake Superior. Excess water from Hays Lake makes its way through the Aguasabon River, over Aguasabon Falls, through Aguasabon Gorge, over a lower waterfall, eventually draining into Lake Superior about two-thirds of a mile south of these falls. The nearby town of Terrace Bay was formed as a result of the construction project.