Capital Power says Alberta’s legal action on power deals is unfair

Capital Power (TSX: CPX) on July 25 issued a statement, following the government of Alberta’s commencement of legal action that seeks to retroactively amend and reinstate certain coal-based Power Purchase Arrangements (PPAs), and prevent the provincial Balancing Pool from accepting Capital Power’s termination of its role as a buyer of the Sundance C Power Purchase Arrangement.

Under the PPA, as drafted and then sold at auction by the government of Alberta, Capital Power had earlier given notice to the Balancing Pool of its intent to terminate its role as buyer of the Sundance C PPA, effective March 24, 2016. Capital Power had a 371-MW PPA covering the coal-fired Sundance Units 5 and 6. The two units themselves total 817 MW.

“We will exercise every legal avenue at our disposal to ensure that the Government of Alberta honours the terms of the PPAs,” said Capital Power President and CEO Brian Vaasjo. “We believe the legal claim is without merit, and we will look to the courts to ensure that the Government of Alberta cannot retroactively amend an arrangement for which Albertan companies paid and upon which they have been relying in good faith for 16 years.”

“We will ask the courts to direct the Government of Alberta to honour the law and the terms of the Arrangements, which include our right to terminate under the change in law provision,” said Capital Power Senior Vice-President, Legal and External Relations Kate Chisholm.

Capital Power said that when companies purchased the PPAs at auction, they bid on them based on their terms, which included the change in law protection. Collectively, it and other buyers paid C$3 billion for the PPAs – money that was returned to Albertans by the government through the Balancing Pool. Buyers would have paid substantially less to purchase any PPA that was missing a change in law clause, Capital Power noted.

It said the announcement by the government claims that the PPA terminations will result in consumers bearing up to C$2 billion in costs between now and 2020. This claim is misleading because it is incomplet, the company added. Based on available public information, the Balancing Pool can reduce its liability to an estimated C$950 million by terminating the PPAs that were recently turned back to them, or to an estimated C$635 million by terminating some PPAs, and retaining and managing others.

Capital Power said it continues to support action to reduce Alberta’s greenhouse gas emissions through the phased shutdown of coal-fired power in the province, including the Specified Gas Emitters Regulation (SGER) changes made as part of the Climate Leadership Plan. The terminations of the PPAs are one of the costs of transition. If the Balancing Pool took prudent action to reduce the costs of PPA management to C$635 million, and spread those over 14 years to align with the overall timeline of the Climate Leadership Plan, the expected impact for an average Alberta family would be about C30-cents per month, the company said.

PPAs were created by the government of Alberta in 2000 as part of the transition from a regulated to a competitive generation market. PPAs are statutory instruments, established under the Power Purchase Arrangements Determination Regulation and continued through the Electric Utilities Act. The PPAs impose legal rights and obligations on buyers, owners, and the Balancing Pool in respect of the costs, revenues, and the right to dispatch the electrical output and capacity associated with the relevant power plants, which were built in the regulated era. The proceeds from the initial PPA auctions and later sales were paid to the Balancing Pool, resulting in $C3 billion being paid to Alberta electricity customers since 2000.

Capital Power is a growth-oriented North American power producer headquartered in Edmonton, Alberta. The company develops, acquires, operates and optimizes power generation from a variety of energy sources. Capital Power owns more than 3,200 MW of power generation capacity at 18 facilities across North America. More than 700 MW of owned generation capacity is in advanced development in Alberta and Kansas.

Alberta says the PPA escape clause was illegally lobbied for by Enron

The Alberta raised the specter of notorious energy marketer Enron in contending July 25 that an attempted offload of PPAs is being implemented through a regulatory clause that was unlawfully enacted when the province’s electricity system was deregulated. This clause was lobbied for by Enron, said the province, “a discredited and now bankrupt US electricity operator at the centre of numerous other controversies and questionable business practices.”

The “Enron clause” purports to give power companies the option to hand off unprofitable PPAs to the Balancing Pool, effectively passing their financial losses and risks on to consumers. It is estimated that the clause will cost up to C$2 billion between now and 2020, when PPAs are set to expire.

“The previous government sold deregulated electricity as a way to transfer financial risk to the private sector in return for giving them the chance to earn greater profit. In secret, they did the opposite – setting up a system where consumers bear all the risk. Albertans should not be on the hook for these backroom deals,” said Sarah Hoffman, Deputy Premier.

“On behalf of the Alberta government, we will be challenging the 2000 action that created the loophole clause that PPA Buyers are now relying on to escape their legal obligations. We will argue that the government had no legal authority to make this change – especially not in closed-door proceedings after a PPA public hearing process had concluded – and the clause is therefore void,” added provincial attorney Joseph J. Arvay.

The court action was begun July 25 with an originating application for judicial review and declaratory relief. The application seeks an order declaring the Enron clause void in law and an order quashing a recent decision by the Balancing Pool to accept the return of Enmax’s now money-losing Battle River 5 PPA  to the Balancing Pool.

The province said that PPA buyers have collectively profited an estimated C$10 billion since the PPAs were established. Facing poor market conditions, four PPA Buyers have applied to terminate their PPAs early, based on an unlawful agreement made behind closed doors between Enron and a former government, said the province.

No corporation that has returned a PPA to the Balancing Pool on the basis of the Enron clause has claimed that government action has rendered them unprofitable. In all instances, the surrenders involve PPAs that will be unprofitable from 2016 to 2020 because of market forces, despite the significant profits they made when market conditions were better, the province added.

If these PPAs are terminated as the power companies want, their losses would be transferred to a financial account called the Balancing Pool, which is wholly funded by residential and commercial electricity consumers. If these PPAs are permitted to be returned to the Balancing Pool on the basis of the Enron clause, losses associated with these PPAs are estimated to be as much as C$2 billion by 2020.

To protect consumers, the government of Alberta said it is taking legal action to have the Enron clause declared unlawful and void, and to overturn the Balancing Pool’s decision to accept the return of the Battle River 5 PPA.

Enmax says it will take part in the legal case

Said Enmax in a July 25 statement: “We look forward to responding with facts during the judicial review process, and we are committed to doing this as soon as possible. However, in the best interest of our Shareholder, the City of Calgary and our customers, we have concerns with the accuracy of the information in the filing and we think it’s important that they know:

  • “These legal agreements with the government have been in place and relied upon for 16 years, and were intended to be respected for a 20-year period by an industry that has invested billions of dollars in Alberta during this time.
  • “We are very disappointed that the government is retroactively challenging fundamental aspects that have been in place in these agreements since their inception. The industry bid on these PPAs through a transparent auction process and collectively paid nearly $3 billion for them, with the proceeds of these sales returned to all Albertans via credits on their electricity bills.
  • “The Government of Alberta should have known about the implications of its actions related to the PPA issue. Alberta Energy and Alberta Justice officials are well versed on the history of PPAs, their importance in the power auction process and their implications.
  • “Given the government’s change in law to carbon costs, ENMAX’s actions on its PPAs were completely foreseeable, legal and reasonable in carrying out its fiduciary duty to its Shareholder – the City of Calgary and its 1.2 million citizens.

“More broadly, we are concerned with the approach the government is taking and the signals it sends for future investment in Alberta. We believe there are cooperative solutions that can meet the government’s climate change goals, manage the costs to consumers and respect the investments industry has made.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.