The Government lawsuit, naming several power companies and two of its own Agencies, landed with a thud on the Alberta electricity sector yesterday.
The suit is appealing the validity of a clause, inserted at the last minute into the Alberta Power Purchase Agreements (PPA's) of 2000, that allows the holders of those PPA's to cancel their ongoing contracts and return responsibility for those contracts to the Government-owned Balancing Pool. The PPA's set the price that has to be paid by the PPA Owners (contract holders) for electricity generated from the old regulated power plants and were sold at auction to the highest bidder. And as to the clause in question, let's just call it the Clause from here on in.
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The law suit, as filed, is sensational, in that it creates a sensational tale of backroom deals between the Alberta Energy and Utilities Board, the Ministry of Energy and the always evil Enron. The innuendo, if not the allegation, is that Neil McCrank, Chairman of the Alberta Energy and Utilities Board, was complicit or remiss in a coverup regarding the last minute inclusion of the Clause in question, outside of the established public process, for the benefit of corporate interests.
There's just one problem with that theory. I know Neil McCrank. I worked under him at the AEUB during that time. And I can tell you the last thing on his mind was some underhanded sculduggery. As I recall, he was pretty damn focused on keeping the lights on.
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When I started with the AEUB in Calgary in 1998 we were three years into the period after the Government had started down the road of electricity and gas deregulation and two years away from them going to a competitive electricity market. Prior to that, all electricity and gas services were fully regulated public utilities.
The effect of this time gap between announcing the policy and enacting the policy was to stop development of any new electricity generation plants during that time. It's funny, but it turns out private capital is very skittish and likes to know what the rules are before they invest.
At the same time Alberta was going through a healthy growth spurt, driving up electricity demand. The result was a dangerously low reserve margin for the system and an extremely tense 1999. I vividly remember Neil leading sessions to ensure that every agency was doing all it had to do to get the final pieces in place to enable new generation investment. It was a serious situation, winter blackouts were looking like a real possibility.
The result of having all of the pieces in place, including the PPA's, was to spur on tremendous private investment in generating capacity. Within a year, the capacity crisis was over.
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The key to this lawsuit is whether or not the Clause was created ultra vires, or outside of the authority of those involved. Let me say right now, I don't know what the answer is to that question.
This is what we know:
There was an extensive public process around the procedures used to create the PPAs
In a final round of input required to make the PPAs ready for sale, a suggestion from ENRON was included in the final PPA documents (I'll get to what it said below)
The AUC and the Ministry of Energy included the Clause without further public consultation, three days prior to the scheduled PPA auction
The Ministry of Energy then requested that the material be exempted from public reporting
I have to admit the last bit doesn't look good. I think it's a real possibility that there was a cockup in the Ministry of Energy and they realized it and swept it under the rug. But the whole Enron, evil corporatist conspiracy thing? I don't buy it. Not for a minute.
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So let's talk about the Clause.
The existing Clause says that: if new Government legislation makes a PPA Owner's contract unprofitable or more unprofitable, the Owner can walk away from the contract.
The suit says that the Clause is no good, and you have to go back to the old clause that said: if new Government legislation makes a PPA Owner's contract unprofitable, the Owner can walk away from the contract.
According to the Government suit, using the old clause would mean that the PPA Owner's should be stuck with their agreements because they are already losing money.
I can tell you why the Clause got amended the way it did. It's because it's a perfectly reasonable Clause.
If you are going to grant protection to investors against Government legislative changes, it doesn't make sense that it would only protect you if you happen to be crossing the threshold from profitable to unprofitable, but not if you're already losing money.
I'm not surprised that the Clause was amended. I'm not surprised that it got added at the last minute. I'm more surprised that it never came up in months' of hearings with millions of dollars spent in representation on all sides. However, it seems to have never come up until 3 days before the PPA auction.
At which point, I'm pretty sure there was a chorus of Oh s**t, how did we miss that?
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I don't know if the suit will be successful or not. I really don't. I have been involved in the regulatory legal and policy world since 1989 and I've never seen anything like this.
But here are the potential outcomes:
The Government wins. The PPA Owners have to eat $2 billion in losses over the next 3 1/2 years because of the current market surplus. The lawyers make out like bandits.
The Government loses. The PPA Owners sue the Government for all of their losses from the date of their notice to terminate the contracts. Customers/taxpayers get the bill. The lawyers make out like bandits.
Before the suit was filed, I believe there could have been a third alternative, where the Balancing Pool would manage the operation of the coal PPAs and start the planned phase out of coal generation. Capital Power evidently analyzed this option and found it could limit losses to $600 million. A lot, but less than the potential loss to customers now.
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So I don't know if the Government suit will win, but I don't think that it should win.
From the perspective of the investors in those companies that stood up to offer $2 billion for the first tranche of PPA contracts, I think it was reasonable for them to want protection from future Government legislation. They were signing 20 year agreements and a lot can change in 20 years - as you may have noticed.
You can't argue that some partial protection is fair, where the PPA owners would be able to return the contracts - if only their books were just a little bit less of a shambles. Those companies put up their investors' billions of dollars on the basis of having protection from adverse Government legislation written into their contracts. I don't think it was unreasonable for the Government of the day to extend that protection and for investors to expect it.
Knowing the men and women involved in trying to make this work at the time, to spin the story into a who-dunnit I think is unreasonable and I wish the Government hadn't done it.
There was no McCrank Conspiracy. Enron didn't grease anybodies' palms.
This lawsuit disparages people I know should be thanked for their service, not dragged into the limelight of political theatre.