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Monday, 13 February 2017


The 2041 Group, which included several capable lawyers, spent many a night parsing the contracts which contained Nalcor’s commitment to Emera for the Nova Scotia Block (that’s the free electricity). Then there’s another set that commits one terawatt hour at a price set by auction at the New England bar.

The group watched in horror as Nalcor openly backed itself into a corner as it continued to spend tens of millions on the Muskrat Falls project knowing, as it did, that the Federal Government had given veto power to Nova Scotia over award of the Federal Loan Guarantee (FLG) and thus project sanction.

By the time Bruce Huskilson, Emera’s CEO, had finished shaking down Ed Martin, the UARB the equivalent of our PUB, acting on behalf of the Government of Nova Scotia must have known Nalcor would agree to any demand to get sanction.

Nalcor’s behavior has always contradicted the rules of common business practice, and of common sense.

One of Nalcor’s claims about which I have always been skeptical is its assertion that there is no recourse for Emera with respect to a delay in providing the electricity committed under the provisions of the Nova Scotia Block. Implicit in the suggestion is that the $1.5 billion Maritime Link (ML) could be completed two or more years in advance of Muskrat Falls’ electricity generation without any obligation by Nalcor, the party responsible to provide compensation for the unused asset.

The cost of servicing the ML debt, together with depreciation and other related expenditures, is estimated at approximately $180 million per year.

In 2014, Nalcor stated: “There is no compensation associated with a delay. This is addressed in the Energy and Capacity Agreement also available on the project website. The commitment to provide energy to Nova Scotia starts with commissioning of the third generating unit at Muskrat Falls and continues for 35 years from that event.” 

This arrangement is out of character for a mature company like Emera, which would be expected to protect their shareholders against non-performance by another contracting entity. It is a fundamental principle of the law of contracts. Evidently Emera believes that, for its part, the shareholders are protected.

Recently, some clarity was provided to this question by Nova Scotia’s UARB. That Board has instigated a Hearing for April 10, 2017 and established a Preliminary Issues List in consequence of an action by Emera subsidiary Nova Scotia Power (NSP). That company is seeking to recover the cost of delay to the Muskrat Falls Generation Facility through the Nova Scotia ratepayers. The company is attempting to recover $162 million in 2018 and another $164 million in 2019. 

Those costs have been included in the application to the UARB (which can be found in the above link):

Emera plans to deliver the Maritime Link on time and on budget. Nalcor has confirmed a delay of at least two years on the dam. 

In seeking this $326 million in payments prior to delivery of the Nova Scotia Block, Emera argues that the Nova Scotia ratepayer will see benefit with the early commissioning of the Maritime Link, which justifies the early recovery. Emera states:

The Maritime Link provides a strategic transformational opportunity for enhanced access to competitive energy markets and should be made available for the benefit of Nova Scotia customers immediately upon commissioning… With the completion of the regional energy loop created by the Maritime Link, NS Power will be well-positioned to access competitive energy markets in a manner not previously possible to obtain value through the import (or export) of energy via the Maritime Link.”
Early commissioning of the Maritime Link may provide some value to Emera and the ratepayers of NS, but the company doesn’t circumscribe its claim at least not yet and has seemingly set out to establish who will pay in any event. For that reason, unless Nalcor completes the ML roughly simultaneously with completion of the Labrador Island Link and deliver the 1000 GWH committed under the Nova Scotia Block we need to ask: who will pay this $326 million which Emera is seeking?

One thing we can safely assume is that the UARB won’t happily allow early recovery from the NS ratepayers, without delivery of the Nova Scotia Block, of all the costs sought by Emera.

Unlike the PUB of this province with respect to Muskrat, the UARB is empowered in Nova Scotia to review all matters pertaining to the ML. The UARB has shown that it will challenge Emera’s subsidiary, Nova Scotia Power, to the benefit of the NS ratepayer. The Dunderdale Government removed the PUB’s review of the Muskrat Falls project when it refused to endorse the scheme. The Ball Administration has failed to give the Board a new mandate regarding the project.

What is likely to result from the UARB Hearings? One possibility is that the UARB will compromise, allowing a partial recovery of the ML costs. Undoubtedly, linked to any such decision will be the amount of energy, if any, which will be available from Newfoundland and Labrador prior to completion of the ML.

(A short primer: If Nalcor completes the LIL by the end of this year Stan Marshall having suggested that that’s the intention, even if some engineers believe he is a bit optimistic — then Nalcor can use the roughly 80 mW of Recall power which Hydro Quebec is currently selling for this province. Nalcor can also utilize surplus power from Island-based hydro sites to help make up the difference. But that power won’t be available during the high-demand winter months except if Nalcor runs Holyrood thermal or buys it from Hydro Quebec. The reader should note that the Recall power is part of Nalcor’s current revenue stream which will be lost if it is given over to the Nova Scotia Block. Thermal energy from Holyrood won’t be cheap. And power purchased from Hydro Quebec won’t be free, either.)

The question remains, if Nalcor fails to deliver any of the power it has committed to NS, what does Emera do if the UARB does not approve the full $326 million over 2 years? Who pays the shortfall?

It is worth reading the language of the Maritime Link Joint Development Agreement. Article 8 refers to the financing of the project. Within this section it makes reference to Emera’s ability to make an application to the UARB for recovery of the Projected Overrun and applicable AFUDC. AFUDC accounts for the interest on the debt, and the return on equity used during construction.

The question is this: do the costs associated with Nalcor’s failure to supply the Nova Scotia Block commensurate with the completion of the ML constitute a cost overrun? 

Put a different way: With Emera having made an application to adjust the UARB Approved Amount due to the additional capital costs, and to the AFUDC during the delay, would the UARB rejection or partial rejection of the cost make Nalcor exposed to the “Unapproved Overrun plus any Financing Costs” as outlined above?

Lets face it: $326 million is a lot of money. The NS ratepayer will not want to pay it, Emera will not want to pay it, and Nalcor will not want to pay it. 

The language in the Martime Link Joint Development does not afford a definitive conclusion. But the many references to Nalcor’s responsibility for part of the capital and financing costs not approved by the UARB are a cause for concern.  From section 3.2:

In short, the Application before the UARB raises many questions: What is the alternative source of power which could squelch Emera’s claim to the UARB? If the available Recall is part of this “solution”, which group of ratepayers NS or NL will have priority access to this cheap energy? If the UARB declines Emera’s Application, does that company have recourse to Nalcor for the additional costs, given the contract language shown in the above Exhibit? 

Nalcor could have an exposure here of several hundred million dollars. 

Likely Nalcor as in the case of the Quebec Superior Court's decision on the Upper Churchill Renewal Agreement and how it impacts the Water Management Agreement will offer the usual assurance that there is no problem here. 

A better option is for the public to give some attention to the issue during, and following, the UARB Hearings. When it comes to transparency, Nalcor could learn a lot from that agency..
Editor's Note: I want to acknowledge an unnamed professional and thank him for his important contribution to the preparation of this Post.