The  Application

On July 22, 2013 the Nova  Scotia  Utility and Review Board (NSUARB or Board) conditionally approved the proposed Maritime Link Project (ML Project).¹ The Maritime Link would enable delivery of  power  from the Muskrat Falls Hydro Electric Project in Labrador to Nova Scotia and through New Brunswick to northeastern U.S. markets, likely resulting in significant market restructuring.

The Maritime Link would be constructed by NSP Maritime Link Incorporated (NSPML), a subsidiary of Emera Inc. (Emera), with a planned in-service date of 2017. The Muskrat Falls Project² is being developed by NALCOR, a Newfoundland and Labrador Crown corporation.

Under the contractual arrangements, NSPML would pay 20 per cent of the cost of the Muskrat Falls Project and the ML Project in return for which NSPML would receive 20 per cent of the output of Muskrat Falls for 35 years. This underpinning of the commercial arrangements between NSPML and NALCOR is described as the “20 for 20 principle.”³   In the first five years of operation of the Maritime Link, NSPML would receive an additional block of electrical energy, as described below. This additional block and NSPML’s 20 per cent share of the output of Muskrat Falls are together defined as the “NS Block.”

The NS Block would be delivered by NSPML to NS Power Inc. (NS Power) for distribution in Nova Scotia to NS Power’s customers. NSPML’s costs of the ML Project would be recovered from Nova Scotia consumers in the rates charged by NS Power. NS Power is also a subsidiary of Emera and an affiliate of NSPML.

On January 28, 2013, NSPML applied to the NSUARB for approval of the ML Project and the related commercial transactions, under the Nova Scotia Maritime Link Act⁴ and the Maritime Link Cost Recovery Process Regulations⁵ (the ML Regulations). Under subsection 5(1) of the ML Regulations, the Board was required to approve the ML Project if it was satisfied that:

1) the project represents the lowest long- term cost alternative for electricity for ratepayers in the Province; [and]

The Muskrat Falls Project

The Muskrat Falls  Project,  with  a  capacity of 824 megawatts (MW),  is  the  first  phase of the proposed development of the Lower Churchill Project  in  Labrador.  With  the later development of the Gull Island Project, the Lower Churchill Project would have a combined capacity of 3,000 MW and be able to provide 16.7 terawatt hours (TWh) of electricity a year. It is described by NALCOR as “the best undeveloped hydroelectric source in North America.”⁹

In addition to the generating facility, the Muskrat Falls Project includes the Labrador- Island Link, which would transmit power from Labrador to mainland Newfoundland, and the ML Project  from  Newfoundland to Nova Scotia. With both links in place, Newfoundland would be interconnected with the North American transmission system, through the Nova Scotia-New Brunswick intertie and New Brunswick’s interconnections into the U.S. The commercial arrangements between the parties provide for transmission access through Nova Scotia for NALCOR for a 50 year term. Emera is also required to provide a transmission path through New Brunswick into New England. Energy from Muskrat Falls could then be sold by NALCOR into markets in the northeastern U.S. Newfoundland’s only existing interprovincial interconnection is with Hydro-Quebec. Its sales to Hydro-Quebec are governed by an agreement that extends to 2041.¹⁰

The Muskrat Falls project was sanctioned by the Government of Newfoundland and Labrador in December 2012.¹¹

The Maritime Link Project

The physical Maritime Link would extend over a total distance of approximately 360 kilometres, including a 170 kilometres subsea section across the Cabot Strait. It would interconnect with the existing transmission systems at Bottom Brook Substation in Newfoundland and Woodbine Substation in Nova Scotia.

For purposes of the application before the NSUARB, however, the ML Project was defined to include, in addition to the design, construction, operation and maintenance of the physical Maritime Link itself:

…the related  transactions  involving the delivery of energy, the provision of transmission services over the Maritime Link and the enabling of transmission service through [Nova Scotia], as set out in a term sheet between Emera Incorporated and Nalcor Energy dated November 18, 2010…¹²

As already noted, the NSUARB was required to approve the ML Project if it was satisfied that the project would provide the lowest-cost alternative for Nova Scotia ratepayers and was consistent with obligations under specified legislation. Thus, while the Board’s “Final Issues List” included the engineering and design details for the Maritime Link itself,¹³ the central issues before the Board revolved around the overall structure and operation of the several contractual arrangements supporting the Maritime Link.

These contractual arrangements include a loan guarantee from Canada, which the Board noted would ensure a materially lower cost of debt for the entire project.¹⁴

Commercial Arrangements

As noted, the basic premise of the commercial arrangements supporting the ML Project is that NSPML will pay 20 per cent of the estimated capital cost and operating costs of the Muskrat Falls Project and the ML Project in exchange for 20 per cent of the energy and capacity from Muskrat Falls for 35 years – the “20 for 20 Principle.”¹⁵

The Maritime Link facilities would have an expected service life of 50 years. NSPML would own the facilities during the 35 year period, at the end of which ownership would be transferred to NALCOR. To compensate for this 15 year differential, for the first five years of operation of the Maritime Link, NALCOR would supply NSPML with an additional approximately 240 gigawatt hours (GWh) per year, referred to as “supplemental energy.”¹⁶

The Maritime Link would be capable of transmitting more than 4 TWh annually, whereas the NS Block of firm power (comprising the 20 per cent share of Muskrat Falls energy and capacity and the supplemental energy) would be less than 1 TWh. The additional capacity of the Maritime Link could be used for NALCOR to supply non- firm power to Nova Scotia ratepayers from any surplus energy available from Muskrat Falls, or from other sources. For purposes of NSPML’s application, this non-firm power supplied to Nova Scotia from NALCOR or from other sources (including imports over the Nova Scotia-New Brunswick intertie) was  referred to as “market-priced energy.”¹⁷ Whether such market-priced energy would in fact be available to Nova Scotia became the central issue before the NSUARB proceeding.

Issues and Decision

1)    Lowest Long-Term Cost Alternative

As  noted,  the  ML  Regulations  required  the Board to approve the ML Project if the Board was satisfied that the project represented “the lowest long-term cost alternative for electricity for ratepayers in the Province…”¹⁸  The Board stated that the applicant had the “burden of proof…on  a  balance  of  probabilities”¹⁹ of showing that the Project met this requirement.

NSPML calculated the net present value (NPV) of the ML Project and other alternative scenarios and concluded that the  NPV  of the project was the lowest across a range of sensitivities. NSPML’s conclusion was  based on including volumes of Market-priced Energy (in addition to the NS Block) in the NPV calculation. The ability of NSPML to pass the lowest long-term cost test without the market- priced energy was challenged.²⁰

Board counsel retained Synapse Energy Economics Inc. (Synapse) “to analyze the economics of the proposed Maritime Link Project in comparison to alternatives including but not limited to the specific alternatives” modeled by NSPML.²¹ Synapse concluded that “the Maritime Link Project as proposed by NSPML…has not been demonstrated to be a definitive least-cost incremental supply resource for NSPI’s system  in  comparison to other options to obtain renewable energy needed to meet [renewable energy requirements under provincial policy].”²² Those other options included indigenous wind or some combination of indigenous wind and imports across the Nova Scotia-New Brunswick intertie.

The Board noted that the Maritime Link could potentially provide other benefits to Nova Scotia ratepayers, including access to market- priced energy and positioning Nova Scotia “in the middle of electricity markets, and no longer at the end of transmission lines with limited market access.”²³ The Maritime Link would also increase reliability.²⁴

However, “the test under the ML Regulations is not a qualitative assessment of the various benefits or risks of the ML Project” but, rather, is “a quantitative measurement of the Application.”²⁵ The Board concluded:

Taking into account all of the evidence, the Board finds, on the balance of probabilities, that the ML Project (with the market-priced energy factored in) represents the lowest long-term cost alternative for electricity for ratepayers in Nova Scotia. In the absence of Market- priced Energy, the ML Project is not the lowest long-term cost alternative.

While the Board finds that the ML Project is the lowest long-term cost alternative, it is not on an overwhelming basis. There are various scenarios, within a range of reasonable assumptions that perform almost on an equivalent basis, or even better in a few cases, than the ML Project. Nevertheless the Board concludes that over the broadest range of assumptions for the ML Project it is slightly more robust than the various other alternatives. On this basis, the ML Project does edge out other alternatives and is deserving of approval under s. 5(1) of the ML Regulations.²⁶

The Board observed, however, that the “fundamental assumption” underpinning NSPML’s application was that Nova Scotia customers would receive a blended rate for electricity that would be a weighted average of the costs reflecting the NS Block and the projected amounts and prices for market-priced energy over the 35 year term.²⁷ It concluded that the availability of market-priced  energy “is crucial to the viability of the ML Project proposal as against the other alternatives” and that “without some enforceable covenant about the availability of the Market-priced Energy, the ML Project does not represent the lowest long-term cost alternative for electricity for ratepayers in Nova Scotia.”²⁸

The Board’s approval of the project was, therefore, subject to the condition that:

…NSPML obtain from Nalcor the right to access Nalcor Market-priced Energy…when needed to economically serve NSPI and its ratepayers; or provide some other arrangement to ensure access to Market-priced Energy.

In the Board’s opinion, such a condition should not create any practical difficulty because it would simply codify what NSPML asserts is the effect of the arrangement in any case. It would also confirm what NSPML already states is Nalcor’s view of their future relationship.²⁹

The Board’s view as to the effect of the condition may, however, have been ill-founded. In the wake of the release of its decision, the premier of Newfoundland and Labrador was quoted as saying that the Maritime Link would be built with or without the approval of the Board and that under no circumstances would Newfoundland and Labrador sign a long-term guarantee to sell market rate hydro-electric power to Nova Scotia.³⁰

The premier of Nova Scotia was also quoted as agreeing that the project would go ahead and that it was never dependent on the Board’s decision.³¹  This position appears to be inconsistent with the Maritime Link Act³² and the ML Regulations³³ and undermines the value of an independent review of the ML Project by the Board.

The premiers’ views may, however, prove to be academic – on October 21, the NSUARB received a compliance filing addressing the Board’s concerns reflected in the condition. It is expected that the Board will establish a process for considering the filing.

2)   Consistency with Legislated Obligations

Before approving the ML Project, the Board was  also  required  to  be   satisfied  that  it was  consistent  with  obligations  under  the provincial Electricity Act³⁴  and any obligations governing the release of greenhouse gasses and air pollutants under the Environment Act,³⁵   the Canadian Environmental Protection Act³⁶   and “any associated agreements.” This requirement is directed at determining whether the Project would   be   consistent   with   Nova   Scotia’s renewable electricity plan to move the province away  from  carbon-based  electricity  “towards greener,  more   local  sources.”³⁸     Under  the Nova Scotia Renewable Electricity Regulations,³⁹ power and energy from Muskrat Falls is deemed to be renewable energy for the purposes of the Regulations.⁴⁰

No party suggested that the ML Project was not consistent with the obligations described in paragraph 5(1) (b) of the ML Regulations and the Board expressly found that it was consistent with those obligations.⁴¹

Mandatory Timeline

The NSUARB’s experience in this proceeding also illustrates one of the potential negative consequences that mandatory  time  limits may have for regulators and participants in proceedings before them. Subsection 5(4) of the ML Regulations⁴² required the Board to make a decision under paragraph 5(1) “no later than180 days after the date the applicant submits an application.” NSPML’s application was filed with the Board on January 28, 2013 and the Board’s decision was released on July 22, 2013. The mandatory time limit was thus met.

However, the Board noted that NSPML had not modeled a hybrid option, combining “more modest amounts of energy from different sources such as indigenous wind imported energy over the Nova Scotia/New Brunswick interconnection, and combined cycle generation, among other sources.”⁴³ In the Board’s view, NSPML had not satisfactorily explained why such a scenario had not been pursued. The Board then observed:

Given the tight timeline afforded  to the Board and to the parties for this proceeding under the ML Regulations, Synapse attempted, but was unable, to successfully complete a Strategist run for a Hybrid option before the filing deadline of its prefiled evidence.⁴⁴

While Synapse did successfully complete a run for a hybrid option in advance of the hearing and filed the results at the hearing, the experience illustrates the potential for unfairness to other parties and to regulatory authorities themselves when subjected to mandatory timelines that allow insufficient time for the compilation of a complete record.