NDP’s $2B PPA lawsuit figure challenged as too high

Questions continue to surround the true intent of the Alberta government’s lawsuit challenging the legality of power purchase arrangements, and specifically a clause that allowed companies to return the contracts to the arm’slength Balancing Pool.

Topping the list is whether the $2-billion cost asserted in the lawsuit has merit.

On Friday, three professors — Trevor Tombe and Martin Olszynski from the University of Calgary and Andrew Leach of the University of Alberta — offered their views to a packed room of industry officials at a breakfast seminar hosted by the U of C’s School of Public Policy.

The presentation was a followup to a paper written by Tombe and Leach whose analysis determined the $2-billion value is overstated by about $1.4 billion.

The report has been discredited by the Alberta government, which by extension appears to have thrown Leach, its climate leadership champion, under the proverbial bus.

Tombe said Friday the reason for the different valuations is the very conservative price curve the government chose for making its case.

“The forecast of future prices is critically important ... I don’t know what prices the government used to estimate its $2 billion, but if you have a more conservative forecast of where prices can go, the losses can mount substantially,” said Tombe.

To be entirely Machiavellian about this, overstating the value better serves the government’s purpose if the number comes in significantly lower.

Tombe also noted not all PPAs were created equally since they’re associated with different power plants. Some, like Keephills, Sundance B and C would have been able to withstand low prices and the increased cost of new Specified Emitters Gas Regulations. A reduction in credits under the Carbon Competitiveness Regulation is what would push them into the unprofitable realm.

This perhaps suggests a caseby-case approach by the NDP government in handling the unprofitable PPAs would have been a better approach, rather than the buckshot of a lawsuit.

A few things remain curious about the government’s approach.

If the Balancing Pool chose to return the contracts associated with the Battle River and Sundance plants, it’s possible the companies owning those plants would either retire them — if properly compensated — or reduce their output.

Either way, a reduction in emissions would be evident in short order and therefore in sync with the government’s climate plan objectives.

The government has the tools to pursue this option. Given the amount of surplus power in the province, the 1,050 megawatts represented by the two plants could be eliminated without threat to grid reliability. So why not take that route? There are still questions about the effect on power prices, and the actual cost. Removing two plants from the system would implicitly increase the book value of the remaining assets. There is also a view suggesting the government would lose out on the associated carbon levies if the plants stopped operating.

While the electricity industry grapples with how this all might play out, there is no getting away from the so-called ‘Enron clause’ the province is relying on to make its legal case. It maintains the clause was inserted outside the purview of the Alberta Electricity and Utilities Board and that no other bidders knew about the ‘or more unprofitable’ clause inserted late into the final PPAs.

According to Olszynski, an assistant professor in the Faculty of Law at the U of C, the courts will need to decide whether that clause constitutes a clarification or an amendment.

Given the PPA bidding went on for three weeks and an army of lawyers scrutinized every contract, it seems unlikely the other bidders weren’t aware of the clause, as the government contends.

Also, the way the bidding process works, when the parties involved request clarification, the same question is most often on everyone’s list. Once addressed, it’s unlikely to be asked again.

Also, a “change in law” clause functions as a standard “out” clause in international contracts; profitable or more unprofitable is not required.

Again, all this is happening in advance of a renewables auction to take place in September. While the government contends there is plenty of interest from companies wanting to bid for these contracts — two issues bear watching.

First, it’s one thing to express interest and make a bid, but it’s another matter to follow through with the bid, put capital to work and actually build a facility.

It will also be worth watching to see if any of the current market participants bids on these renewable contracts.

It will be very telling if none of the incumbents participate.

There is a sense in all this that the province wants the companies to bear the full burden of the unprofitable PPAs because the companies in question made money on their investments.

But that really means Albertans will pay, as the costs will be passed through.

The flip side is that Alberta’s balance sheet was enhanced because those companies — not the public purse — invested roughly $16 billion in infrastructure, not to mention buying the natural gas and coal needed to run the facilities in question.

And while some quietly wonder if this is all a step on the road to re-regulating the electricity sector, Leach made the point Friday that Albertans would have paid much higher electricity prices if the system was still regulated.

Too many questions and not enough certainty.

An investment chill has taken hold in Alberta. Income streams and the value of an investment changes as uncertainty increases. Companies demand a higher risk premium and if they can’t make the numbers work they look to another jurisdiction.

The impact on Alberta from a slowdown in investment — already happening because of broader macro trends — means a decrease in economic growth.

The government should not compound what is already compromised.