Experts explain the story behind Alberta's power purchase legal action

The outcome of a controversial legal action launched Monday by the Alberta Government could have dramatic impact on how much consumers and companies pay for electricity in the future.

If government loses the case, the impact on consumers will be hard to specifically gauge, according to Jim Wachowich, legal counsel for the Consumers' Coalition of Alberta.

Wachowich said it could cause upward pressure on prices, "and eventually that upward pressure on prices would flow through to customers, absent any other changes in the market.

"And that's the real challenging point," said Wachowich. "We don't know what other changes are going to be in the market."

Nigel Bankes, a professor who teaches resource law at the University of Calgary, predicted that consumers, over the long term, could see increases on their electricity bills as costs are passed on by the Alberta Balancing Pool.

A "Balancing Poolrider"appears as a line item on electricity bills each month.

According to its 2015 financial statements, the Alberta Balancing Pool has returned $4.4 billion to Alberta electricity consumers through allocations and rebates since 2006.

Deputy premier Sarah Hoffman said Monday that $2 billion in additional costs will be passed on to consumers through the Balancing Pool if the courts don't side with the government.

If the NDP government loses its case, companies will likelybe able to walk away from their power purchase arrangements, or PPAs, transferring the risk for buying electricity to the government-owned Balancing Pool.

The government is asking the courts to rule on the legality of a clause inserted into a provision between the Conservative provincial cabinet in 2000 and companies bidding on PPAs. Under that clause, companies can terminate their PPAs if a government change to the law renders the arrangement "more unprofitable."

The current Alberta government alleges theprovision that includes that clausewas reached in secret, and intentionally withheld from the public. It further argues the clause should be ruled unlawful and void.

What is a PPA?

Power purchasing arrangementswere established as part of the electricity deregulation move in the mid-1990s. The PPAs were intended to create competition in the marketplace.

Nigel Bankes, University of Calgary

"A PPA is an arrangement whereby the owners, such as Atco, Edmonton Power, TransAlta, were allowed to retain ownership of those assets, but they were effectively forced to sell what's referred to as the bidding rights to that (power) generation. So a purchaser under a PPA essentially buys the right to bid the generation into the market, into the power pool.

"And the compensation that the old generators received was essentially compensation to cover their fixed and variable costs. In other words, the same sort of financial arrangements they would have received under the former prior to deregulation cost of service regulation.

"We had three generators at that time when deregulation occurred who had very powerful market positions."

How does a PPA work?

Jim Wachowich,legal counsel for the Consumers' Coalition of Alberta.

"If you think of an oil well, anybody may have gone out and drilled that oil well, and brought that oil well into production. They may then go sell the next year, or two years, or three years of production from that well, to a single person in the marketplace.

"That single person in the marketplace may then store that oil, or choose to refine it or resell it to the market at large, or they may use it for their own needs.

"And that's in essence like the PPA holder. They owned the output, and they sold some of that output to retailers, to resell in the marketplace. They may have sold some of that output to large-scale users of electricity, large industrial customers, so that they would have a guarantee of supply in a future year. They may have held some for their own needs, if they were an energy intensive company. Although I don't know if that was always the case."

What is the Balancing Pool?

Jim Wachowich

"The government had to create an entity that could control any residual power.That entity was the Balancing Pool. When certain PPAs did not sell in the original 2000 auction, they were retained by the Balancing Pool. The Balancing Poolhas had various cash flow through it which has showed up as a Balancing Poolcredit on customers bills as they've sold off portions of that previously unsold energy."

Can companies increase their rates to cover losses?

Jim Wachowich

"The unregulated retailer in the province can simply post a new price. But anyone else, under regulation, has to get the rate approved by the Alberta Utilities Commission, whether it's for regulated power contracts or the distribution wires charges that Enmaxor Epcoror Atco or FortisAlberta charge their customers.

"This Balancing Poolcharge has been either a pool charge, so everybody pays it, or it has been put on transmission so you can't avoid it by choosing retailer B over retailer A."

What's at stake?

Jim Wachowich

"You have contracts that were established 16 years ago, and had a few years left to run. And these contracts were from the output of these power plants in Alberta. They weren't the ownership of the plant, they dealt with the output of the electrical power generated by these plants. They had a few more years left to run, and the parties who held that output, who had purchased these PPAs, had returned them to the entity known as the Balancing Pool.

"They had done that because they were now suffering due to the government's climate-change legislation."

Were you surprised by the government's legal action?

Nigel Bankes, University of Calgary

"They'd been signalling for some time they were going to be looking at the validity of the purported termination by the buyers under these PPAs. So I guess I wasn't surprised. And in terms of timing, they essentially had to do it now, because they had six months from a decision that had been made by the Balancing Pooland that six months would run out in the next couple of days."

What are the chances the Alberta government will succeed in its legal case?

Nigel Bankes, University of Calgary

"I guess I'd put it this way, it's an argument that's worth running, because the stakes are very high. And it's hard to see what the downside to the province and the attorney general is in bringing this argument. I think what I would say is, unless the province can succeed in getting this amendment provision deleted, I'd say it's on very poor ground to prevent companies from terminating these PPAs."