PPA – Effective Date of Termination – Change in Law
In this decision, the Alberta Court of Queen’s Bench (“ABQB”) considered an application by ENMAX PPA Management Inc. (“ENMAX”), requesting a declaration that the effective date of the Battle River Power Purchase Arrangement (“BR PPA”) termination was January 1, 2016. The Balancing Pool maintained that the termination took effect on July 13, 2016, when it assumed ENMAX’s role as buyer under the BR PPA.
For the reasons summarized below, the ABQB found that the effective date of termination of the BR PPA was January 1, 2016, at 12:01 am.
Background
In December 2015 the Province of Alberta amended the Specified Gas Emitters Regulation and the Climate Change and Emissions Management Act. Those amendments, increasing ATCO’s costs of running BR5 (commencing January 1, 2016), were to be borne by ENMAX under the BR PPA.
ENMAX determined that these amendments constituted a “Change in Law” under the BR PPA and reasonably expected that, as a consequence, the continued performance of its obligations as Buyer under the BR PPA would be rendered unprofitable, or more unprofitable, for the remainder of the term of the BR PPA.
On December 11, 2015, ENMAX issued a notice to ATCO and the Balancing Pool, that it was terminating the BR PPA effective January 1, 2016, at 12:01 am.
On January 27, 2016, the Balancing Pool concluded the termination to be valid. On July 13, 2016, it assumed ENMAX’s role as buyer under the BR PPA.
Power Purchase Arrangements
The ABQB described the nature of power purchase arrangements (“PPA”) as follows:
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a PPA is a standardized set of contract-like terms promulgated under the Power Purchase Arrangements Determination Regulation;
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PPAs enable parties wanting to market electricity to acquire the right to specified electricity production until year-end 2020; and
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rights to sell power under PPAs facilitated the transition from the regulated pricing of electricity towards more market-based pricing of electricity.
The Battle River PPA
The ABQB explained that:
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the Battle River Generating Station is a coal-fired thermal electricity generating facility located in Forestburg, Alberta, operated by ATCO Power Canada Ltd (“ATCO” or the “Owner”). The Battle River Generating Station consists of five generating units, but only the power generated by Unit 5 (“BR5”) was the subject of the BR PPA;
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the BR PPA entitled ENMAX, as the “Buyer”, to the rights to offer electrical power from the BR5 until December 31, 2020, and obliged it to pay the Owner throughout that term; and
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under the BR PPA, the Buyer is required to keep the Owner whole for any net changes to its cash flows resulting from any “Change in Law”, as defined in the BR PPA. The Change in Law clause provided that if any such Change in Law could reasonably be expected to render continued performance of the BR PPA unprofitable to the Buyer (ENMAX), or more unprofitable to the Buyer, then the Buyer could terminate the arrangement without being liable for any termination payment.
The Balancing Pool
The ABQB explained that:
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the Balancing Pool is a statutory body established under section 75 of the Electric Utilities Act (the “EUA”) and was established to facilitate the transition from the regulated pricing of electric energy towards market-based pricing within a “fair, efficient and openly competitive” (“FEOC”) market;
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the Balancing Pool is funded by all system ratepayers via the Independent System Operator’s (“ISO”) tariff pursuant to EUA sections 82 and 85(1)(h); and
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the Balancing Pool’s roles and responsibilities include the following:
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conducting auctions of PPAs; and
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providing a backstop for the market against the risk of an extraordinary event such as force majeure in relation to PPAs; and
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the Balancing Pool has specific duties under the EUA, which include:
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selling generation assets when it can receive fair market value for them (EUA, s 85(1)(d);
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acting commercially in respect of power under PPAs that did not sell by auction or that reverts to the Balancing Pool by expiry or termination of a PPA (EUA, s 85(1)(b));
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managing its accounts so that no profit or loss results (EUA s 85(1)(j)); and
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managing generation assets in a manner consistent with the eligibility requirements for a person to hold a PPA (EUA s 85(1)(c)).
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Nature of PPAs
The ABQB found that PPAs are not strictly commercial contracts, but are a component of a comprehensive statutory scheme enacted to ensure FEOC operation of the electricity market in Alberta. PPAs not strictly being contractual instruments was based on the following findings:
(a) the PPA wording was made final by legislative act, rather than an agreement by private parties;
(b) PPAs do not include all the essential elements to the creation of a contract;
(c) PPAs are not stand-alone documents, and it is necessary to consider other statutory provisions to understand the complete terms that govern the relationship between PPA parties and to understand the intent behind their words;
(d) the wording of PPAs makes it clear they operate in conjunction with the broader regulatory regime contemplated by the EUA. (E.g. half of all their recitals commence with: “By operation of the Act” and PPAs required prior approval of the Alberta Energy and Utility Board (“AEUB”)); and
(e) the parties recognized that the wording of Section 4.3(j) in the BR PPA had been revised by, or at least clarified by, the AEUB regarding: “the Buyer shall be entitled to terminate the PPA and shall not be liable for, nor entitled to any Termination Payment if a Change in Law renders the PPA unprofitable, or more unprofitable,” since the words “or more profitable” were not contained in the PPA document itself.
Based on the above, the ABQB found that to interpret the BR PPA it was necessary to consider the text of the arrangement within the legislative scheme as a whole. This would include the EUA, the Balancing Pool Regulation, the Power Purchase Arrangements Determination Regulation, the Power Purchase Arrangement, the FEOC Regulation, and the ISO Rules.
BR PPA Effective Date of Termination
Considering other BR PPA termination provisions
The ABQB found that:
(a) section 4.3(j) of the BR PPA was the operative provision governing ENMAX’s termination, which provided that: “to the extent that a Change in Law … could reasonably be expected to render … this Arrangement … unprofitable to the Buyer … then the Buyer may terminate this Arrangement”;
(b) without more, section 4.3(j) suggested the right to terminate was effective immediately; and
(c) this interpretation was reinforced by reference to other BR PPA sections contemplating termination that included express notice periods before termination, indicating that the drafters turned their minds to the effective dates of terminations and chose to not insert any period of prior notice, or any payment precondition, before a Section 4.3(j) termination would take effect.
Considering the words of section 4.3(j) of the BR PPA
The ABQB found that the other wording of section 4.3(j) militated strongly in favour of ENMAX’s interpretation that termination was effective on January 1, 2016. In this respect, the ABQB found that:
(a) the end part of section 4.3(j) provided that the Buyer not be liable for, nor entitled to any Termination Payment which suggested the drafters’ intent not to have a Buyer bear any cost consequence from a Change in Law; and
(b) such intent that the Buyer not bear any cost consequence for a Change in Law required that termination to be effective immediately.
Considering the Balancing Pool Regulation
The ABQB found that the Balancing Pool’s interpretation would render the legislated interim payment scheme between notice of the termination and verification of its validity superfluous. Section 2(i) of the Balancing Pool Regulation provides that “on receipt of notice [in respect of an extraordinary event (e.g. Change in Law)], begin making payments as set out in an arrangement until all matters … are agreed to or resolved.”
The effect of the interim payment scheme was to immediately relieve ENMAX of its obligation to make payments while the Balancing Pool conducted its investigation. During this period, the Balancing Pool must pay the PPA owner, in this case, ATCO. On the completion of the assessment, the Balancing Pool can either: (1) verify the legitimacy of the claim of an extraordinary event; or (2) dispute the claim’s validity. In the case of dispute, if the Balancing Pool prevailed through the dispute resolution process, ENMAX would be obligated to reimburse it for payment made during the interim period.
That was not the case here, as the Balancing Pool confirmed the validity of ENMAX’s termination of the BR PPA under the Change in Law provision. This meant no reimbursement was necessary. The ABQB noted that if the Balancing Pool’s interpretation were correct, section 2(1)(i) of the Balancing Pool Regulation would require ENMAX (the Buyer), not the Balancing Pool, to continue to make such payments until the Balancing Pool verified the extraordinary event. The ENMAX interpretation of the effective date of termination was the one consistent with the broader legislative scheme.
Considering the Purposes and Objects of Legislative Scheme
The ABQB found that the ENMAX interpretation was more consistent with the purposes and objects of the legislation in two respects:
(a) a Change in Law termination taking effect immediately was more consistent with the intended role of PPAs in the transition towards a FEOC market; and
(b) this interpretation was also more consistent with the Balancing Pool’s statutory role as the backstop for extraordinary events.
With respect to being more consistent with the Balancing Pool’s “backstop” role for extraordinary events, the ABQB explained that the Balancing Pool interpreted the PPA and its statutory regime in a way that would keep itself whole in such events, rather than it keeping affected market participants whole, for the transition to a FEOC market.
Conclusion
The ABQB concluded that the Balancing Pool’s interpretation undermined the attainment of the statute’s objects, whereas the ENMAX interpretation fulfilled them. The ABQB found the effective date of a section 4.3(j) PPA termination to be the date the Buyer indicates in its notice of termination, that is on or after the Change in Law takes effect.
The ABQB declared the effective date of termination of the BR PPA to be January 1, 2016 at 12:01 am.
