In recent years Alberta has seen interest from, and entry of, data processors and bitcoin miners. Given the abundance of natural gas and related infrastructure, sophisticated natural gas producers and Alberta’s energy only electricity market (which is similar to the Texas electricity market) the reasons for this are obvious. However, as demonstrated by a recent Alberta Utilities Commission (the “AUC” or “Commission”) enforcement decision, understanding the nuances of the regulatory regime for both the generation and consumption of electricity in Alberta are of import to any entity seeking to establish a data processing and bitcoin mining operation in Alberta.
On August 19, 2021, the Commission released an enforcement decision in respect of the allegations against Link Global Technologies Inc. (“Link Global”) that Link Global contravened the Hydro and Electric Energy Act (“HEEA”) and AUC Rule 007. In the summer of 2020 Link Global began operating two small power plants in Alberta (the “Sturgeon Plant” and “Kirkwall Plant”), without approval from the Commission to do so. However, Commission approval is not required if certain requirements are met - generally, and amongst other things, if the electric energy from the generation is for the person’s own use (“Own Use Requirement”).
The enforcement decision provides some clarity on the types of commercial construct may be acceptable to meet the Own Use Requirement. However, the consequence for non-compliance with the Own Use Requirement remain uncertain as the Commission’s penalty phase for Link Global is ongoing and has recently seen new evidence introduced that may lead to either a reopening of the enforcement phase or further colour in respect of the enforcement decision. We had originally intended to publish this blog once the enforcement decision was issued, but in light of this latest development we, instead, intend to publish a subsequent blog once the remaining Commission process has run its course.
Requirements to Self-Supply
In order to operate a power plant in Alberta, a person must either obtain approval from the Commission or otherwise be exempted from the need for an approval. There are generally two paths to exemption: (i) in the case of generation less than 10 megawatts (MW), without application to the Commission so long as certain requirements outlined in AUC Rule 007 are met, including the Own Use Requirement (“Small Generation Exemption”); and (ii) in the case of generation equal to or in excess of 10 MW, upon application to the Commission for an exemption - again, the Own Use Requirement must be met. The Link Global situation involved the Small Generation Exemption and to qualify for this exemption, the following criteria must be met:
- the power plant’s capacity is less than 10 MW;
- the person generates electric energy solely for their own-use (i.e. the “Own Use Requirement”);
- no person is directly and adversely affected;
- the power plant complies with AUC Rule 012: Noise Control; and
- there is no adverse effect on the environment.
During the enforcement phase of the proceeding, Commission enforcement staff and Link Global reached a partial settlement – which was accepted by the Commission in the enforcement decision – in respect of the following agreed upon contraventions:
- Link Global had operated the Sturgeon and Kirkwall Plants without an approval from the Commission, contrary to the HEEA and AUC Rule 007: Applications for Power Plants, Substations, Transmission Lines, Industrial System Designations and Hydro Developments.
- The power plant operations at the Sturgeon Plant had exceeded the permissible sound levels specified in AUC Rule 012.
- Any administrative penalty for the agreed upon contraventions should range between $50,000 to $75,000 with a reduction of up to 50 per cent.
The primary issue considered by the Commission in the enforcement phase was whether the characteristics of the Sturgeon and Kirkwall Plants met the criteria for the Small Generation Exemption.
The Sturgeon and Kirkwall Plants consisted of natural gas production facilities, supplying natural gas as a fuel to thermal electrical generating units, which in turn provided electric energy to digital currency processing facilities located onsite at each location. Neither the Surgeon Plant nor the Kirkwall Plant were connected to the Alberta Interconnected Electric System.
In the context of the Own Use Requirement, the issue the Commission examined was whether the consumption of electric energy by one company (Block One) for its bitcoin operations and as provided by another company (Link Global) pursuant to a master services agreement met the “definition” of “own-use”. That agreement specified that the “[t]he Parties are independent contractors to each other, and this Agreement does not and shall not establish any relationship of partnership, joint venture, employment, franchise, or agency between the Parties.” This changed on March 8, 2021, when ownership of Block One’s digital currency processing facilities was transferred to Link Global (the “March 8 Agreement”) - this change was likely the result of the then active AUC enforcement investigation.
During the enforcement phase, Link Global took the position that despite the agreement specifying that the parties were independent, Link Global and Block One acted as de facto partners and therefore the electricity generated by Link Global was for its “own use”. In rejecting this position, the Commission found that the Own Use Requirement was meant to apply to a “person” as contemplated under the HEEA, and such “person” does not include partnerships or joint ventures for the purpose of exempting entities from its approval requirements. However, after ownership of Block One’s digital currency processing facilities was transferred to Link Global under the March 8 Agreement, the Commission found that a single entity owned the generating units and the digital currency processing facilities on each site, which met the Own Use Requirement.
Despite meeting the Own Use Requirement after the change of ownership under the March 8 Agreement, the Commission found that Link Global did not meet the totality of the criteria for the Small Generation Exemption and therefore was required to obtain approval to operate the Sturgeon and Kirkwall Plants. The Commission then directed that until such time as such approvals were obtained, Link Global was to cease operations at the Sturgeon and Kirkwall Plants.
Although the partial settlement in respect of the range of potential sanctions - in the form of administrative penalty - was reached, Link Global and Commission enforcement staff did not during the course of the enforcement phase of the proceeding agree whether a one-time amount to address any economic benefit obtained by Link Global as operator of the Sturgeon and Kirkwall Plants was warranted given the contraventions. That is, the issue of what monetary penalties including whether or not Link Global garnered any economic benefit; the amount of such a benefit; whether Link Global should be required to disgorge any such benefit; and the actual amount to be disgorged, was not resolved and is now currently ongoing before the Commission and has yet to conclude.
The Commission’s Link Global enforcement decision provides data processors and bitcoin miners navigating the complex regulatory regime for electricity generation and consumption in Alberta with some clarity in respect of one aspect - the Own Use Requirement - of the regime. As evidenced by this enforcement decision, the Own Use Requirement has implications in respect of the need for Commission approval for generation facilities and whether exemptions for such approvals are defensible or attainable. Additionally, the Own Use Requirement also has implications for electricity consumption under the Electric Utilities Act (“EUA”). Generators, data processors and bitcoin miners seeking to operate in Alberta need to be fully cognizant of the Alberta regime and its nuances, including the Own Use Requirement, so as to ensure that the commercial constructs used are fully compliant with both the HEEA and the EUA.
As noted, new evidence was recently introduced during the Commission’s ongoing penalty phase for Link Global, which may lead to either a reopening of the enforcement phase or further colour in respect of the enforcement decision. That evidence relates to the services provided by Link Global and the commercial construct it was operating under following the March 8 Agreement. This may lead to the Commission providing further clarity in respect of the “Own Use Requirement”. We intend to publish a subsequent blog once the remaining Commission enforcement and penalty process for Link Global has run its course.