Bill 13, An Act to Secure Alberta’s Electricity Future, has received Royal
Assent. Bill 13 sets out significant
changes to electrical generation and distribution in Alberta, including the
creation of a Capacity Market. Further,
Bill 13 proposes to end the era of “Stores Block”, the Supreme Court of
Canada’s jurisprudence relating to utility asset disposition - so-called
“stranded assets”.
Changes to Legislation
Bill 13 is intended to advance a number
of goals, including:
-
creation of a capacity market
- increased investor confidence
- consumer protection
- the creation of greater opportunities to generate and distribute renewable power
To bring about these changes, Bill 13 amends
the legislation presently governing electrical generation, transmission and distribution
in the Province. Amendments to at least
five separate acts are planned: Alberta Utilities Commission Act, Electric Utilities
Act, Hydro and Electric Energy Act, Renewable Electricity Act, and the Gas Utilities Act.
Alberta’s Capacity Market
One key change in Bill 13 is the creation
of a Capacity Market by the year 2021. Alberta
presently utilizes an energy only market or what is often referred to as a
wholesale generation market. This approach
is rare (Alberta is one of only two jurisdictions in North America to use it).
In an energy only market prices are based
on supply and demand; generators must bid into the market to sell their
power. Unfortunately for generators, market
prices can be depressed for lengthy periods of time. This has been the experience in Alberta. Consequently, generators are forced to make
investment decisions based on the hope of the market being high when they are
prepared to sell. There is no certainty
as to the price that will be available.
This approach, it has been argued,
creates investment uncertainty. In light
of the province’s need for an estimated $25 billion dollars of investment in
electrical generation by the year 2030, as part of the early phase out of coal
in favor of more renewable and less polluting means of generation, the
provincial government has stated that investment uncertainty is not an option.
The Capacity Market addresses investor
uncertainty by paying generators through a mix of competitive auction contracts
and fixed costs payment. In effect, a Capacity Market is two markets: (1) a
market where generators compete to sell the power they generate and (2) a
market where generators compete for payments to keep generation capacity
available to produce electric power when required.
Generators will thus receive two revenue
streams: energy payments, which are paid to the generator for the electricity
sold; and capacity payments, which are paid to the generator for making
generation capacity available on demand. Investors gain certainty that they will at least be paid something for
their efforts with the prospect of earning a premium in the “spot” market.
Utility Asset Disposition
Stranded assets are those assets a
utility no longer requires. In the Stores
Block case[1] the asset was land that ATCO purchased in 1922. In 2001, when the land was sold, it earned $6
million dollars more than what is was carried for on ATCO’s books. The question was who keeps the upside – the
utility or rate payers? The Supreme
Court of Canada concluded that the utility would keep the profit.
This authority was subsequently applied
by the Alberta Court of Appeal on multiple occasions, to varied effect. Perhaps most significantly, the Court of
Appeal subsequently held that if utilities could profit from the upside of
stranded assets they would also have to bear the risk of any losses, for
example where assets were destroyed by natural disaster.
The Supreme Court of Canada’s decision in
Stores Block had far reaching implications for Alberta utilities and rate payers. The decision now appears to be destined for
the history books as Bill 13 proposes an new legislative approach to the issue
of stranded assets.
Under Bill 13, the Alberta Utilities
Commission would now be called upon to balance the interests of the parties and
determine compensation for stranded assets on a case by case basis having
regard to the public interest. The
change is likely a victory for utilities who have long lobbied against the
downside of the Supreme Court’s decision.
Closing
Bill 13 is a lengthy and complicated
piece of legislation that is intended to make major changes to Alberta’s
electric energy market place. To a large
extent, the implications of Bill 13 will not be known until several regulations
are created that will implement the bill.
However, creation of a capacity market is
already under way with a series of auctions having taken place or planned in
the near term. These auctions have
resulted in multiple bids. In this
sense, the approach appears to be spurring investment dollars as the government
had hoped, at least in the renewable generation space.
Less obvious, but likely to be more
problematic, are the changes to the approach on stranded assets. Given the large dollars often at play there
is much incentive on both sides to fight tooth and nail over the proceeds of the
sale of utility assets. Removing the
analytical framework set out by the SCC and returning these decisions to the
AUC on a case by case basis will, we predict, result in numerous appeals at
least one of which will likely end up back before the Supreme Court. Stores block 2.0?