Robert Hemstock, BComm, LLB
What are the Power Purchase Arrangements ("PPAs")
The starting point to understand the issues I comment on in this website requires some basic understanding of the PPAs.
The PPAs were a key part of electricity deregulation as they were the instrument used to transition the existing electricity generation plants in Alberta from 3 owners under a regulated monopoly framework to a deregulated competitive electricity market. It was originally hoped that the sale of the PPAs to third party buyers could introduce as many as 12 new market participants into Alberta's new competitive electricity market.
There were a total of 12 PPAs created in 2000. A PPA is a detailed contract-like document that, like most large commercial contracts, details the rights and obligations of the parties in hundreds of pages of legal language and mathematical formulas. The PPA lays out all the terms and conditions under which the transfer of control over the sale of electricity from mostly regulated coal-fired generation plants will occur from the original owner of the generation plant to companies that paid the most for each PPA in a PPA Auction held in August 2000. It also details the terms and conditions under which the original plant owners will continue to be paid to operate and maintain the plant.
Under the terms of each PPA, the three regulated generation plant owners (PPA Owners – Atco, TransAlta, and Epcor) continue to own and operate these generation plants for the remainder of the plants lives. The PPA Owner receives a set monthly payment from the "PPA Buyer" each month. The PPA Buyer assumes market risk, change in law risk, and other risks but has the right to sell the electricity into the competitive electricity market.
The PPA Buyer makes a profit if the revenue for the power generated by the plant was higher than the PPA Buyer's cost which consists of the winning PPA Auction bid and payment obligations to the PPA Owner. Conversely, the PPA Buyer will lose money on the PPA if its winning PPA Auction bid and payment obligations exceeds the revenue it receives from the market or the plant is out of service for a lengthy period of time.
There's another entity that is a party to the PPAs, called the Balancing Pool. It is a separate government corporation and is often referred to as a government agency. It was created under the Electric Utilities Act and has specific duties relating to the PPAs. It's required to distribute benefits and costs of the PPAs to electricity consumers, manage any unsold PPAs in a commercial manner, participate in PPA related regulatory matters, and participate in PPA dispute resolutions. Since 2001 the Balancing Pool distributed the PPA Auction proceeds and other PPA revenues to Alberta electricity consumers through a credit on the "Balancing Pool Allocation" line item on their electricity bill. Since 2018, Alberta electricity consumers have lost this credit, and they now get a charge on their electricity bill under the "Balancing Pool Allocation". It's this charge that is being used to pay the estimated $2 billion in costs related to the PPA terminations.
The content of each PPA that defines the rights of each PPA Owner, PPA Buyer and the Balancing Pool were written by an entity hired by the Government of Alberta that was described in the Electric Utilities Act (the "EUA") as the Independent Assessment Team or IAT. The IAT consisted of two world class consulting firms, namely PriceWaterhouseCoopers ("PWC") and Charles River Associates.
While the PPA document itself reads like a fairly standard commercial contract, there are a few features that distinguish the PPAs from normal contracts. The PPAs don't have signatures of the PPA Owner and PPA Buyer on them because the PPAs were not negotiated directly by the parties. Also, the Balancing Pool has rights and obligations under each PPA.
So the PPAs are not technically contracts, rather they are regulations under Alberta law that define the rights and obligations of each of the PPA Owner, PPA Buyer, and the Balancing Pool. Hence the use of the term "arrangement" rather that "agreement". As a regulation, the PPAs are enforceable by all three parties to them just like a contract would be. The IAT was required under the Electric Utilities Act to seek approval of the final version of each PPA from the Alberta Energy and Utilities Board (the predecessor of the current Alberta Utilities Commission).
Most of the paragraphs in the PPAs were identical but in a few cases there were unique paragraphs in some PPAs to address specific limitations or requirements of the particular generation plant the PPA applied to. The change in law provision in Section 4.3(j) of the PPAs that allowed the PPA Buyer to terminate its PPA if a change in law rendered continued performance of the PPA "unprofitable or more unprofitable" was the same language used in all 12 PPAs. The full content of all the PPAs were made public as it's contained in the Power Purchase Arrangements Determination Regulation that is a law in Alberta and is available to the public from the Queen's Printer Office.
The challenge for the IAT in drafting the PPAs was to balance the interests of the PPA Owners, PPA Bidders/Buyers, and the Balancing Pool so the PPA Auction would attract interest from qualified PPA Bidders to submit bids in the PPA auction that would be high enough for the Government to agree to accept.
The length of the term of each PPA was set based on the remaining useful life of each generation plant. At the end of this period the generation plant would revert back to the PPA Owner to either undertake plant reclamation or extend the life of the plant. No PPA had a term that extended past December 31, 2020. Some PPAs had shorter terms.
Eight PPAs were sold in the first PPA Auction held in August 2000. Four PPAs did not sell because the bids on them were not high enough. These four unsold PPAs reverted to the Balancing Pool, who has managed them since 2001.
Additional auctions for the unsold PPAs or smaller power contracts were created by the Balancing Pool in 2000, and again in 2002-2003, and in 2005-2006. The approximate $3-billion in proceeds received from these sales has been returned by the Balancing Pool to electricity consumers in Alberta as a credit on their bills through the "Balancing Pool Allocation" line item.