Capital Power must continue offsetting the emissions of its Genesee 3 coal plant to levels equivalent to those from a natural gas combined cycle power plant. The Alberta Utilities Commission ("AUC") rejected Capital Power's request to have this voluntary commitment removed from the approval for the plant. The decision illustrates the difficulty companies faces in the face of evolving greenhouse gas regulations.


EPCOR (which subsequently spun out its generation business at Capital Power) voluntarily included the offsetting commitment when it applied to for approval of the Genesee 3 project. In its original application, EPCOR stated that it was making a public commitment that corporate net incremental GHG emissions attributable to the project would be equal to or lower than those from comparable combined-cycle, natural gas-fuelled electrical generation. This commitment was also made during the public hearing. It was incorporated into the final approval granted by the AUC.

When EPCOR was seeking its approval, the federal government was strongly indicating that it would regulate greenhouse gases emissions. EPCOR was likely more inclined to make the voluntary offsetting commitment in anticipation that a similar mandatory requirement would be imposed under federal law. However, this has not yet occurred (the federal government has imposed emission limits starting in 2015 that will apply to new coal plants and those reaching end-of-life, but these will not be relevant to Genesee 3 for many years).

In the meantime, Alberta enacted its Specified Gas Emitters Regulation, which imposes a less onerous reduction obligation on the plant. Capital Power therefore asked the AUC to amend its approval to remove the voluntary offsetting condition. Capital Power would still have been required to comply with the Alberta regulations. Capital Power therefore argued that, by being held to a higher standard than that imposed by law, it was being put at a competitive disadvantage with other generators in the province (which, unlike other provinces, has a true competitive market for power). It also argued that the Alberta regulations adequately protect the public interest that EPCOR tried to serve by making its voluntary commitment.

In its decision, the AUC rejected these arguments, stating the following:

"The Commission finds that there have been no discernable changes in the market conditions or environmental factors considered by the Board in EUB Decision 2001-111. The Commission also finds that the Specified Gas Emitters Regulation was not intended to supersede or replace Clause 10 and that the second sentence of Clause 10 cannot be interpreted to mean that the Specified Gas Emitters Regulation replaces Clause 10. Nor can the Commission conclude that the requirements of the Specified Gas Emitters Regulation constitute a new public interest standard to which the Commission must now adhere. The Commission finds that there are no impacts on the functioning of the competitive market arising from the imposition of Clause 10 nor are there any material implications for the competitive position of GP3 in the market. The Commission also finds that it is not in the public interest to relieve Capital Power of the cost burden of adhering to Clause 10 given that it was a voluntary commitment and given the environmental implications of doing so."

Implications of the decision

Environmentalists applauded the decision, as the Genesee 3 plant will continue to offset its emissions to a level equivalent to gas-fired generation.

However, the decision will almost certainly make companies less pro-active in managing greenhouse gas emissions. Specifically, the decision may serve to discourage other companies from making voluntary reduction commitments in anticipation of regulation. Following the economic downturn of the past few year, governments appear very reluctant to regulate emissions aggressively. Companies will likely take their cues from regulators, and may be very reluctant to make the type of binding voluntary commitment that was made with respect to Genesee 3.

This chilling effect may be particularly pronounced for public companies in light of new guidance from the Canadian Securities Administrators. As discussed in a recent Davis LLP Securities and Corporate Law Bulletin, the guidance reminds reporting issuers of the need to consider and disclose material environmental issues. The guidance refers specifically to a need to discuss potentially material pending environmental legislation. Where evolving environmental protection requirements (and the company's response to those evolving requirements) may have a material effect on the issuer's capital expenditures, earnings and competitive position in the current financial year or in future years, those effects should be assessed and, if found to be material, should likely be disclosed. It may therefore be the case that a public company that made a voluntary commitment today in anticipation of future regulation would have to discuss that commitment in its securities disclosure, particularly if the commitment could possibly alter the company's competitive position in the marketplace.