By David Yager, August 3, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
To business people who cherish predictability and stability this was really bad news. On July 25 Alberta’s NDP government announced it was taking itself to court to strike down the three words “or more unprofitable” in electricity deregulation regulations dating back to 2000. The NDP claimed this an immoral and possibly illegal loophole in Power Purchase Arrangements (PPA) electrical distributors are using to exit unprofitable electricity purchase contracts which will become “more unprofitable” when the government jacks up carbon taxes again on January 1, 2017. The litigation will have damaging ripple effects through Alberta’s battered oil and gas industry that nobody is talking about.
The announcement was accompanied by a major propaganda campaign. Assigned spokesperson Deputy Premier Sarah Hoffman called it a “secret” agreement between disgraced and bankrupt former electricity distributor Enron Corporation and the previous government. The allegation is Enron persuaded the regulator of the day, Alberta Energy Utilities Board (AEUB), to insert these three words in the PPA contracts without public notice. Which it did. Hoffman declared, “At the last possible moment the day before the PPA auction commenced, they inserted the ‘Enron clause” (it has never been known as this prior to July 25) into the PPA contract language. The government and board took steps to hide what they had done from the public”.
Since higher carbon taxes were announced last year power distributors such as Enmax (Calgary’s utility), Capital Power (Edmonton’s former utility), TransCanada and Altagas have announced they intend to sever their PPAs for coal-generated electricity because new government policy has made already unprofitable contracts more unprofitable. They all believe they are within their rights based on the wording of the PPAs.
This is only a glimpse of what is sure to be a convoluted, uncertain and expensive process between now and 2030 when the NDP intends to phase out coal power entirely. Coal is the cheap and reliable energy source which supplied over half of Alberta’s total electricity in 2015.
Hoffman declared the PPA cancellations would cost Alberta electricity consumers $2 billion and her government would have no part of it. “When you talk about $2 billion of liability passed on to power consumers, we’re not just going to stand by and let that happen.” Going back to 2000 she said, “The government and board (AEUB) took steps to hide what they had done from the public. They made $10 billion in profits and they don’t want to take two (billion) in losses.”
The NDP took to newspaper ads to support their case. A $100,000 campaign across the province was titled, “The Government of Alberta is going to court to protect Albertans from being forced to pay for the business losses of five power companies”. Using a term nobody had ever heard of the government wrote, “This Enron clause was never raised….And, there is evidence the Enron clause was enacted unlawfully by the previous government then deliberately withheld from the public.”
The invention of the term “Enron clause” to accompany the lawsuit was intended to taint all power distributors seeking PPA relief as being like Enron, a company convicted in 2001 of conducting illegal business for profit. Never before has a provincial government publicly alleged so many of its most respected and essential corporations are guilty of this sort of malfeasance. That two of the Enron-like entities are the municipally-owned or municipally controlled utilities for Calgary and Edmonton (EPCOR, the former Edmonton-owned utility, is still Capital Power’s largest shareholder) is irrelevant.
Since the lawsuit was unveiled much has been revealed. The NDP claims when it jacked up large emitter carbon taxes last year it was not until March 2016 it learned the PPAs contained an exit clause protecting buyers from government legislation which made the 20-year agreements “more unprofitable”.
This position has been refuted by multiple sources. In the 2015 provincial election leaders’ debate Premier Jim Prentice warned NDP leader Rachel Notley her campaign promises to increase carbon taxes and phase out coal would trigger significant financial penalties. With the PPA cancellations public in March the Wildrose Party opposition brought the issue forward in question period in the legislature. In both cases the response was denial and deflection.
In a Calgary Sun column July 28 columnist Rick Bell found Gary Reynolds who was the head of the Balancing Pool (the agency which will cover the losses of the cancelled PPAs on behalf of the government) when Premier Ed Stelmach first introduced the large emitter carbon levy in 2007. The “more unprofitable” clause was known to the government and its implications discussed at the time. Bell wrote, “In fact, adds Reynolds, if there is one thing of the people in the government needed to know about these electricity contracts is would be how a change in law affected those deals”. When Bell asked Reynolds if these contracts were secret he responded, “Preposterous. It should be in their files. Every business has files. Who is supposed to be keeping files if not the government’s energy department? It’s ridiculous”. Bell wrote, “He (Reynolds) says the real damage was done last June with the NDP government’s hike of the carbon levy. He says the new government “didn’t do their homework.” Reynolds added the government is “trying to wash their hands” of the fact the carbon tax increase triggered the PPA exit provisions.
Edmonton-based electricity consultant David Gray worked for the AEUB when the PPAs were created and negotiated. In a CBC Radio interview Gray was asked if there was a secret backroom deal to which he replied, “There was no secret backroom deal, Enron didn’t grease anyone’s palms. It was a matter of getting these contracts in place so that the auction of them could proceed. At the time we desperately needed new generation investments and this was part of what got that investment to happen.”
Asked why the phrase “more unprofitable” was added, Gray replied, “…if you use the original clause, or the clause that the government wants to go back to, it only applies if you happen to be crossing the threshold from profitable to unprofitable. But it doesn’t give you any protection if you’re already unprofitable and the government adds to your losses…I’m not surprised that sort of clause was required”.
A retired power executive who asked not be named told this writer he figures the chances of the government winning this lawsuit are remote. His primary concern is when the NDP loses will they change the law and force the power distributors to bear the losses anyway? The major propaganda campaign accompanying the legal challenge make it appears that if the government can’t win in a court of law it is trying to set the stage to win in the court of public opinion.
Politically this mess is being fingered as Notley’s first major public blunder. A Metro News story July 27 wrote, “Lori Williams, a political scientist and professor at MRU (Mount Royal University) said the incident raises questions about co-ordination and competence. ‘It’s going to be a tough one for her to overcome’, Williams said. ‘We’ve had a premier, for the most part, that’s seemed quite bright and entrepreneurial, but now we have someone who is showing that dissonance or contradiction’”.
The oilpatch has two reasons to be very concerned.
First, there has been a growing effort by the tall foreheads in downtown Calgary to work with the NDP government which, because of the outcome of the royalty review and Notley’s recent public support of pipelines, has been appearing somewhat pragmatic. Several major oilsands producers have publicly ratified NDP climate change policies and helped invent the oilsands emissions cap. Stuck with this government for another three years or longer, that oil executives should try to make the situation work is understandable.
However, the determination of the ideological side of the NDP to tackle this electricity issue this way should cause everyone to realize this is a highly political operation in Edmonton which, when threatened, will put its own credibility and future ahead of the greater provincial economy. The sends a terrible message to investors all over the world about how the present government is prepared to manage private/public sector agreements and disputes involving billions of dollars.
Second, if by some chance the lawsuit is successful the implications could be serious. The way Alberta energy industry regulation works is enabling legislation is passed into law in the legislature (creation of the ERCB for example) then regulators have tremendous flexibility and authority to react to the issues of the day to make things work. The vast majority of the rules, guidelines and regulations under which the oilpatch operates introduced by the AER or the former ERCB or SR&ED have never been debated or even discussed in public, the current NDP definition of secretive. But they nonetheless become law and both industry and government are expected to comply. If a regulator’s decision is outside of enabling legislation it is made legal by an Order in Council by cabinet. This is how Alberta is able to function when the legislature only sits three months a year, if that.
Should the courts determine the process by which an Alberta regulator operated in this case is illegal, where will it end? Depending on the foundation of the decision, the collateral damage on a mountain of existing rules, regulations and guidelines could be enormous. The government claims it never understood the existence of the “more unprofitable” clause until months after hiking coal carbon taxes. This is hardly a confidence builder given the decision to use the courts to challenge the government’s own legislation.
Electricity deregulation in Alberta has been complex and controversial. But it has also been successful in many ways. Significant capacity has been added in Canada’s fastest-growing province with no public funding. Check Ontario to see how much this matters. In the massive and enormously rewarding economic expansion that took place between 2000 and 2014 the price of electricity was never an obstacle to growth or punitively priced to consumers. The main issue was whether the lights would come on when you flicked the switch, and they always did. Not a thing a beauty but it worked. Now the NDP has waded into the electricity business in a big way that is going to cost everyone more no matter what happens.
When the NDP was elected in May 2015 it is safe to say the oil and gas industry was displeased even though the results indicate many oilpatch workers voted for them. However, the collapse in oil prices and the struggles of everyone created a de-facto détente between the Crown and many critics in the past 10 months.
But this move on this file is an egregious setback for the government’s credibility. Oil and gas execs will do what they must to get through the upcoming months and year, government relations included. However, it would be reckless for anyone managing other people’s money to relax and let their guard down.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]