The Alberta Court of Queen’s Bench (Court) has released an important decision regarding the Alberta power industry, which brings certainty to the effective dates of termination of power purchase arrangements (PPAs) in Alberta.
In the late 1990s, the Government of Alberta deregulated the electricity market and introduced competition into the market for electrical power and created the Balancing Pool to, among other things, backstop risks related to PPAs and to perform other statutory functions. PPAs were developed as the instrument by which the “owner” of a formally regulated power plant was required to make committed electrical capacity and energy available to a “buyer”, which acquired all offer and dispatch rights to that electrical capacity.
By the terms of the PPAs, the buyer assumes certain risks and costs associated with a change in law. Obligations for increased costs associated with changes in law are generally passed on to the buyer from, and after, the effective date of any change in law. However, if a change in law could reasonably be expected to render continued performance for the balance of the effective term of a PPA unprofitable or more unprofitable to the buyer, the buyer had the option to terminate the PPA without being liable for, nor entitled to, any termination payment.
In June 2015, the current Government of Alberta amended the Specified Gas Emitters Regulation which, effective January 1, 2016, imposed increased operational efficiency requirements on regulated facilities and substantially increased the cost of fund credits.
As a result, all of the buyers of thermal PPAs in Alberta terminated their respective PPAs on the basis that, among other things, those increased taxes and charges rendered performance of the PPAs unprofitable or more unprofitable.
ENMAX PPA Management Inc. (ENMAX) provided the Balancing Pool with notice of termination of the Battle River PPA effective January 1, 2016, and argued that date was the date in which the Balancing Pool assumed the applicable rights and obligations under the PPA. The Balancing Pool argued that the effective date of termination of that PPA should be delayed until its appointed agent began dispatching the Battle River PPA about seven months later. The parties agreed to have the Court decide the issue.
The Court ruled that the termination was effective January 1, 2016 — the date ENMAX stipulated in its notice of termination and also the date that the change in law took effect.
The Court concluded that the interpretation that the Balancing Pool urged undermined the attainment of the legislative objectives of the PPAs, whereas the ENMAX interpretation fulfilled those objects and purposes.
Among the detailed reasons provided by the Court, the Court noted that having been one of the few jurisdictions in North America to deregulate the electricity market, the legislators and relevant regulators understood the apprehension among buyers concerning the government reverting to price regulation, or making some equally adverse decision to the interests of a buyer. The Court noted that, as a result, the legislators chose to address that concern by including a change in law termination provision for buyers. The Court held that the interpretation being given to PPAs by the Balancing Pool undermined that intended allocation of risk and protection to Buyers. Furthermore, the Court noted that the interpretation of the Balancing Pool was inconsistent with its statutory role as the backstop for extraordinary events such as termination.
This decision promotes certainty in the power industry where termination rights are of fundamental importance and play a critical role in risk management.