We generally do not write about court cases here at AlbertaPowerMarket.com. However, the decision earlier this month of the Alberta Court of Queen’s Bench in Enmax PPA Management Inc. v. Balancing Pool (the “Decision”), about the Battle River PPA, caught our eye. Not because the Decision created any interesting new law – the judge simply interpreted some words and applied them to a set of circumstances. Instead, the Decision got us thinking about its implications for the electricity market, and whether it might be the catalyst that ultimately leads to the termination of the Battle River PPA by the Balancing Pool. There are some dots to be connected, but let’s start with a high level discussion of the Decision, and a parallel legal proceeding launched by the Government of Alberta, also with ENMAX over the Battle River PPA.
In the Decision, the court interpreted certain provisions of the Battle River PPA, a power purchase arrangement under which ENMAX was (and perhaps still is) required to purchase all of the electrical power generated by Unit 5 of the Battle River coal-fired facility, owned and operated by ATCO, through to December 31, 2020. ENMAX’s obligations under the Battle River PPA were backstopped by the Balancing Pool, an Alberta Government agency responsible for ensuring stability in the Alberta power market when it comes to the Battle River and other PPAs in the province. In late 2015 ENMAX provided notice to the Balancing Pool that it was terminating the Battle River PPA, effective January 1, 2016, pursuant to change in law provisions in the Battle River PPA. If the termination was valid, the Balancing Pool would be legally required to take the place of ENMAX as the buyer on the termination date.
While the Balancing Pool concluded in early 2016 that the termination by ENMAX was valid, it argued that the termination was effective July 13, 2016 when the Balancing Pool actually took over the role of buyer under the Battle River PPA. Neither ENMAX nor the Balancing Pool wanted to be the buyer under the Battle River PPA in this six month period because the Battle River PPA was unprofitable (millions of dollars unprofitable) in that period. In fact, the Battle River PPA is still unprofitable and is currently causing significant losses each month for the buyer under the PPA, whether that buyer is legally ENMAX or the Balancing Pool. The court found that ENMAX’s termination date of January 1, 2016 was the correct one.
For its part, the Government of Alberta launched a separate court proceeding in July of 2016 against ENMAX (and others), challenging, among other things, the validity of ENMAX’s termination of the Battle River PPA (the “Provincial Challenge”), even though its own government agency (the Balancing Pool) had already concluded that the ENMAX termination was valid. The Provincial Challenge is ongoing. That brings us to the connection of the next dot, from the Decision to that Provincial Challenge.
It is reasonable to think that this “effective date of the termination question” was an unanswered question that the Province was likely hoping to use as leverage in its dispute with ENMAX. That door is now closed, and in that regard the Decision is a loss for the provincial government, and not just the Balancing Pool. It is also reasonable to conclude that the Province will not want to risk another judicial loss to ENMAX, especially one closer to the next provincial election that is required to be held in 2019. Lastly, in the Decision, though the court did not expressly deal with the merits of the Provincial Challenge, it did highlight the purpose and importance of the change in law provisions relied on by ENMAX to terminate the Battle River PPA, stating:
“the legislators endeavoured to provide as much certainty as possible to potential PPA buyers and relieve them of non-market related risks. They looked to such potential buyers to take on market risk, business risk, capital risk, regulatory risk, long term price risk and commercial counterparty risk, among other risks, but took steps to protect them from governmental risk – via the Change in Law provisions. Having been one of the few jurisdictions in North America to attempt the transition to market based commodity pricing of electricity, the legislators, and the AEUB by its Errata, appear to have understood the apprehension among the pool of potential investors in PPAs around government losing its resolve and reverting to price regulation, or making some equally adverse decision to the interests of a PPA buyer. The legislators chose to address that concern, expressly raised by industry during the IAT consultation, by including the Change in Law provisions. (emphasis added)”
The Decision should encourage the Province to reconsider the merits and risks associated with the Provincial Challenge, and to settle its ongoing dispute with ENMAX. Such a settlement is also consistent with what the Province agreed to with all of the other buyers under similarly terminated PPAs in Alberta. That leads us to the connection of the final dot, from the settlement of the Provincial Challenge to the termination of the Battle River PPA.
If the Provincial Challenge is settled then the Balancing Pool will very likely, as it did for the other terminated PPAs in Alberta, become the buyer under the Battle River PPA. That will provide the Balancing Pool with a statutory right under section 97 of the Electric Utilities Act to terminate the Battle River PPA on six months’ notice to ATCO by making a payment to ATCO equal to the then current net book value of Unit 5. Earlier this summer the Balancing Pool issued a report in which it concluded that such a termination of the Battle River PPA would save electricity consumers about $200 million between 2018 and 2020. We wrote about that here. In fact, the Balancing Pool implied in the report that it would have recommended the termination of the Battle River PPA then to stop the bleeding (accumulating losses) but that it “cannot be terminated until the government lawsuit [Provincial Challenge] contesting the return of [the Battle River PPA] to the Balancing Pool is resolved.”
Perhaps the dots will not all be connected – the Provincial Challenge will not be settled as a result of the Decision and the Battle River PPA will not be terminated by the Balancing Pool thereafter. But a logical outcome of the Decision would be a settlement so that the Battle River PPA could be terminated by the Balancing Pool. At a minimum, the Decision should cause the Province to take a hard look at the merits of the Provincial Challenge, and to decide if the likelihood of success warrants risking the continued accumulation of losses under the Battle River PPA. Losses that will be passed on to Alberta’s electricity consumers by the Balancing Pool unless the Provincial Challenge is successful.
 For an excellent legal analysis of the Decision, see Professor Nigel Bankes’ case comment “ENMAX PPA Terminates Under the Change of Law Clause When the Buyer Provides the Balancing Pool with Notice of Termination” (18 October, 2017), online: ABlawg, http://ablawg.ca/wp-content/uploads/2017/10/Blog_NB_ENMAX_PPA.pdf
Kent D. Howie is a partner in the Calgary, Alberta office of the national law firm Borden Ladner Gervais LLP. He practices in the Alberta electricity market and is the editor of and contributor to AlbertaPowerMarket.com. The views expressed in this article are those of the author and not of Borden Ladner Gervais LLP.