The board's decision hinges on Nova Scotians getting the best price for surplus electricity based on market conditions — something Newfoundland and Labrador Crown utility Nalcor Energy wouldn't commit to providing through the Maritime Link.
Emera Inc. (TSX:EMA), the company behind the link, said it needs time to study the implications of the board's decision, while Nalcor said its obligation is to get the best value for its excess power because the Muskrat Falls project is being built first and foremost for the benefit of ratepayers in Newfoundland and Labrador.
Nalcor president Ed Martin said the utility is still reviewing the decision and Emera doesn't have to get the surplus power it needs from Muskrat Falls.
"Nalcor is one option for providing some additional power," he told a news conference in St. John's.
Martin's comments appeared to shed doubt on Nalcor's willingness to negotiate a new deal with Emera to meet the board's condition, although Nova Scotia Energy Minister Charlie Parker didn't give any indication that the project could be derailed by the board's decision.
"I've got every confidence that Emera will work this out and meet the conditions as outlined by the board," he said. "We're looking forward to the flow of electricity from Labrador and Newfoundland in 2017."
Premier Darrell Dexter said Nova Scotia customers would benefit if Emera is able to meet the board's condition.
"I think the condition that the board set was a common sense one and leaves Emera with some work to do to make sure the ratepayers are properly protected," he said.
In a separate development Monday, Hydro-Quebec filed a motion in Quebec Superior Court asserting its right to buy power from the Churchill Falls Generating Station. It wasn't immediately clear what impact the legal manoeuvre might have on Muskrat Falls.
Nalcor has a 35-year deal with Emera subsidiary NSP Maritime Link Inc. to supply Nova Scotia with 20 per cent of the energy from the first phase of Nalcor's hydroelectric development on the Lower Churchill River in exchange for paying 20 per cent of the capital and operating costs of the $7.7-billion Muskrat Falls project.
Some opponents of the deal have questioned how much it will cost NSP Maritime Link to buy energy from Muskrat Falls if it wants to exceed the 20-per-cent block for which it has negotiated an annual contracted price.
The utility and review board appears to share those reservations.
"The board concludes that the availability of market-priced energy is crucial to the viability of the ML project proposal as against the other alternatives," it says. "More importantly, the board finds 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 ratepayers in Nova Scotia."
For those reasons, it says it attached the condition that the project obtain from Nalcor the right to access market-priced energy or provide some other way of getting energy at that rate.
"In the board's opinion, such a condition should not create any practical difficulty because it would simply codify what NSPML (NSP Maritime Link Inc.) asserts is the effect of the arrangement in any case," the decision says.
The board says the 170-kilometre cable represents the lowest long-term cost alternative for electricity ratepayers in Nova Scotia on the balance of probabilities, but it is only the cheapest option by a narrow margin.
During hearings earlier this year, consumer and small business advocates in Nova Scotia as well as an alliance of industrial customers that included Michelin and Imperial Oil (TSX:IMO) questioned whether the Maritime Link would benefit electricity customers, who would foot the bill for the project.
Opponents also doubted assertions from Emera and Dexter that the project would stabilize electricity rates in the future.
Nova Scotia's NDP government is in the last year of its mandate and the opposition parties have tried to make electricity rates a ballot box issue for voters, with Liberal Opposition Leader Stephen McNeil arguing Monday that power rates have jumped by 30 per cent over the past four years.
McNeil said the utility and review board decision shows the Maritime Link deal as it is currently written means Muskrat Falls isn't the cheapest energy option for the province.
"The regulator has confirmed that the deal is not acceptable, unless it is significantly amended to be more favourable for Nova Scotia Power ratepayers," he said in a news release.
Emera president Chris Huskilson said the company will take the time it needs to do an analysis of the board's decision.
"In the meantime we continue to refine final construction estimates and work continues on the project," Huskilson, who was not made available for interviews, said in a statement.
John Merrick, the province's consumer advocate, said the condition imposed by the board surrounding surplus energy was "essential" from a ratepayer's point of view.
"The board has turned what was a very questionable application into a proposition that has got considerable benefit for Nova Scotians and is much improved for Nova Scotia ratepayers," he said.
Emera has argued that Muskrat Falls would serve about 10 per cent of Nova Scotia's power needs and give it a new source of clean energy.
Construction of Muskrat Falls is underway in Labrador with the project scheduled to generate power by 2017.
Jamie Baillie, leader of the Nova Scotia Progressive Conservative party, said the board's ruling backs his argument that the Maritime Link deal still needs work.
"It's a good project, but it's a bad financial deal," he said.
Harnessing power from the Churchill River has been complex for decades, starting with a 1969 contract between Quebec and Newfoundland over the development of the Churchill Falls Generating Station.
The controversy over Hydro-Quebec's rights to secure that power arose again Monday when the company went to the Quebec Superior Court to affirm its right under the 1969 deal to buy "virtually all of the power and energy produced by Churchill Falls Generating Station until Aug. 31, 2041."
In a news release from Montreal, the utility takes issue with assertions that from 2016 — when the Upper Churchill power contract is renewed — until 2041 when it expires, Hydro-Quebec would only be entitled to monthly allotments of energy.
Nalcor has argued that it has the flexibility under a 2009 water management agreement with Churchill Falls (Labrador) Corp. to co-ordinate the Upper Churchill dam with the downstream Muskrat Falls power station to meet energy needs in all seasons.
Gilbert Bennett, Nalcor vice-president for the Lower Churchill project, has repeatedly said that related regulations and the water management agreement all respect Hydro-Quebec's rights under the 1969 deal.
Nalcor's Ed Martin and Natural Resources Minister Tom Marshall of Newfoundland and Labrador said they could not comment on Hydro-Quebec's filing because they haven't reviewed it.
— With files from Sue Bailey in St. John's, N.L.