For a child running a lemonade stand, the ramifications of getting the basic economic facts of life wrong are minimal: is there demand, and can you fulfil it? The worst-case scenario is that the proprietor will have to consume his or her own product, at the cost of his or her weekly allowance.

For the owners of the proposed $7.7-billion Muskrat Falls hydroelectric power project – i.e., the taxpayers of Newfoundland and Labrador – the stakes are significantly higher. However, the same principles hold true: without a secure supply or buyers for the energy, ratepayers in the province will be required to subsidize the capital costs via their taxes,while users of electricity also will see significant rate increases.

This is the scenario now facing Nalcor, the Crown corporation that is busy constructing the Muskrat Falls project in Labrador, even as new questions threaten its viability.

On a single day this past July, Nalcor suffered two possibly expensive – if not fatal – blows. The first came from the Nova Scotia Utility and Review Board (UARB), which added a potentially costly condition to approving a $1.52-billion deal for the Maritime Link, which is a subsea cable designed to transport electricity from the Muskrat Falls project to Nova Scotia.

Emera, a subsidiary of Nova Scotia Power, is a minority partner in the Muskrat Falls project and is guaranteed to receive 20% of the power in return for building the undersea cable. But the UARB said the lack of commitment from Nalcor to provide guaranteed power beyond the 20% creates “substantial uncertainty.” Therefore, the UARB ruled that the current deal is not the cheapest energy alternative for Nova Scotia ratepayers.

But Newfoundland and Labrador cannot afford to tear up its agreement with Emera, since the province lacks demand within its own borders for all of the 824 megawatts that will be produced by Muskrat Falls. In addition, Nalcor cannot gain access to potential markets in the U.S. for surplus Muskrat Falls power without Emera’s participation, since a land route through eastern Canada is not an attractive option.

Which brings up the second problem – this time, on the supply side. In July, Hydro-Québec filed a motion with the Quebec Superior Court asking whether its rights, as guaranteed under the 1969 Churchill Falls contract, would be breached by Nalcor if Nalcor diverts power from the Churchill Falls facility to the Muskrat Falls project. Hydro-Québec is arguing it has exclusive rights to use almost all the electricity generated by the Churchill Falls power station.

If the court rules in favour of Hydro-Québec, then Nalcor’s construction work on the Muskrat Falls project may be for nothing. At the very least, the court action may delay federal loan guarantees for the project.

Alienating Quebec also would represent a repetition of an error made by Newfoundland during the 1960s, when it originally negotiated the Upper Churchill Falls project with Quebec: failing to establish transmission rights through Quebec in order to gain direct access to U.S. markets.

The courts were not kind to Newfoundland and Labrador when it has tried to take action that Quebec views are contrary to the 1969 contract, which expires in 2041. The latest loss came last month, when the Quebec Superior Court ruled against a request by Newfoundland and Labrador Hydro for a judicial review of a decision made by Quebec’s energy regulator regarding the energy provider’s 2006 proposal to transmit energy generated at Lower Churchill through Quebec and into the U.S. and parts of Canada.

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