Canada: Energy @ Gowlings November 9, 2010

Edited by Paul Harricks

Contents

• Gowlings Energy Team Grows Domestically and Internationally
• Introducing Wind Energy Law in Canada
• Renewed Regulatory Framework for Electricity
• A Purely Symbolic Accession?
• Aboriginal Consultation and Accommodation: New Guidance from the Supreme Court of Canada (Rio Tinto Alcan Inc. v. Carrier Sekani Tribal Council)
• LDC Corner - OEB Issues Consultant's Report in connection with Review of Electricity Distribution Cost Allocation Policy

Gowlings Energy Team Grows Domestically and Internationally

Gowlings is pleased to welcome three well-known U.K. lawyers to its existing London office. Robert Armour, Michael Taylor and David Shasha join as significant additions to Gowlings' London office as well as its Energy, Infrastructure & Wind Energy Industry Group.

A familiar name in the energy field in the U.K. and Brussels, Robert Armour joined Scottish Nuclear in 1990 as company secretary and legal adviser, and played a leading role in the privatization of British Energy in 1996. As general counsel of British Energy, then the U.K.'s largest electricity generator, he was critical in the company's U.K. and overseas acquisitions as well as the groundbreaking restructuring when the company encountered financial difficulty in 2002. Having stayed with British Energy throughout its turbulent history from flotation to acquisition by EDF, Robert was a key member of its executive team and was deeply involved in the company's turnaround and subsequent sale to France's EDF. This was one of the biggest recent M&A deals in Europe. In 2007, he received the Order of the British Empire for services to the electricity industry. Robert joins the Firm as senior counsel.

Michael Taylor has over 30 years of experience in both the energy and project finance fields. Considered one of the U.K.'s leading lawyers in these areas, he has been listed in the UK Legal 500, and recognized by Chambers and Partners for his work in energy and project finance. Before joining Gowlings, Michael was a senior partner at a large international business law firm where he advised on many important energy projects and set up and led the firm's banking and projects team in Italy. Michael joins the Firm as a partner

David Shasha brings 30 years of experience advising on privatizations, mergers and acquisitions, international joint ventures and public and private offerings in the energy (oil & gas and power), mining, financial services, electronics, telecommunications and pharmaceuticals sectors. David's projects experience includes transactions in power, water, mining and infrastructure, in the U.K. and worldwide. He has particular expertise in Central and Eastern Europe, having worked on transactions in Bosnia, Bulgaria, Croatia, the Czech Republic, Hungary, Kosovo, Latvia, Poland, Romania, Serbia, Russia, the Slovak Republic and Ukraine. He recently worked on a privatization project in Zambia. David joins as head of Gowlings' Energy, Infrastructure and Mining team in London.

Ian Mondrow has a wealth of experience practising energy regulatory law, having represented electricity generators, transmitters and contractors, energy retailers, and natural gas and electricity consumers before the Ontario Energy Board and in other Canadian regulatory forums. Before joining Gowlings, Ian practised at a prominent national firm, served as special advisor to the chair of the Ontario Energy Board, and was vice-president, government and regulatory affairs with a major integrated energy retail and solutions company. Ian joins as a partner in Gowlings' Toronto office.

Introducing Wind Energy Law in Canada

According to the 2009 World Wind Energy Report, wind energy capacity worldwide has doubled every three years, reaching 159,213 megawatts in 2009 and generating 340 terawatt-hours, the equivalent of the total annual electricity demand of Italy, the seventh largest economy in the world.

Gowlings is pleased to contribute to the development of renewable energy resources in several key international market sand to present Wind Energy Law in Canada, a guide to legal issues and challenges facing wind energy industry participants in Canadian markets. A copy of the guide can be downloaded at the following site:

http://www.gowlings.com/KnowledgeCentre/article.asp?pubID=2107&lang=0

Renewed Regulatory Framework for Electricity
By Ian Mondrow

In a regulatory response to rising electricity costs in Ontario, the Ontario Energy Board (OEB) has announced its intention to "renew" its framework for electricity regulation. Through three initiatives focused on cost, the OEB will address impending substantial investment in transmission and distribution networks to maintain reliability and connect new renewable generation facilitated under the provincial government's "green energy" policies. Through these three initiatives the OEB intends to "consider how to manage the pace of... bill increases for consumers". All three of these initiatives will directly affect the province's electricity distribution utilities (and, of course, consumers).

First, the OEB will look at how investments should be planned and prioritized in reference to "total" costs, including both network costs and the costs of the generation facilities being connected. Under the rubric of its new "outcomes" drive focus, the OEB will consider ways to assess the combined cost impact of current and impending electricity infrastructure (generation and wires) development, and perhaps how to coordinate and prioritize such development on a regional basis. Second, the OEB will refresh its rate increase mitigation policy, looking at ways to reduce cost impacts on consumers. This will likely mean considering models for collection in rates of funds in anticipation of project commencement rather than waiting until a project is in service. This advance collection approach was used by the OEB for smart meters and for Hydro One's recently reviewed "green energy plan". Third, the OEB will consider how it might build investment performance standards as wells as investment efficiency measures and incentives into the distribution work plans that it will be reviewing and approving going forward.

Pending completion of this regulatory framework review, the OEB will extend the current electricity distributor incentive regulation plans until the new program is completed, so that the outcomes of the review process can inform the design of the next generation distributor incentive regulation plan.

As this regulatory program unfolds, an interesting tension might well arise between the OEB's traditional approach to letting prices reflect current costs, consistent with the basis of economic regulation as a substitute for markets to inform consumers and drive optimal investments, on the one hand, and the consumer protection responsibilities driving a more "engineered" approach to delivered electricity costs on the other hand. While not necessarily inconsistent, the two approaches may take some thought to properly harmonize.

A Purely Symbolic Accession?
By Terry McNally and Hari Balaraman

In another step in the rapid evolution of Indian nuclear policy, on October 27, 2010, Dinkar Khullar, India's representative to the International Atomic Energy Agency, signed the Convention On Supplementary Compensation For Nuclear Damage (CSC) on behalf of the Government of India, joining 13 other signatory countries. It is clearly a fulfilment of one among many commitments made by India to the United States of America pursuant to the Agreement for Cooperation between the Government of the United States of America and the Government of India concerning peaceful uses of nuclear energy (123 Agreement), (123 Agreement) released on August 3, 2007. Previously, on September21^st, the President of India signed into force The Civil Liability for Nuclear Damage Act, 2010 (the Liability Act), creating a nuclear liability regime in India.

The CSC Current Status

At the outset, it must be recognized that the CSC only enters into force when five countries with more than 400,000 units of total installed nuclear capacity sign and ratify the convention. Currently 14 countries have signed the convention but only four have ratified it. At present the US is the only party to the convention with substantial installed capacity of approximately 300,000 units of nuclear capacity. India's nuclear capacity represents about 4 percent of that of the US. Therefore it is unclear how far India's signing by itself takes the CSC towards enforceability.

Incompatibility between the Indian nuclear liability regime and the CSC

Since the signing, many observers, both inside and outside India, have commented on the apparent incompatibility between the nuclear liability regime embodied by the CSC and that of the Liability Act. In general, the CSC nuclear liability regime channels and restricts liability to the operators of nuclear plants, whereas the Indian legislation extends liability beyond the operator of a nuclear power plant by giving the operator the right of recourse against suppliers to the operator's nuclear power plant. Although many observers have called for the Liability Act to be amended to restrict liability to the operator, it is fairly clear that the Indian government, at this time, does not have the political support to do so and its representatives have declared there is no intention to amend the Liability Act. Therefore the question to explore is what may be the benefit of India signing the CSC.

International Acceptability

There are many reasons that both India and the US may welcome India's accession to the CSC. For one, whether the accession results in ratification or not, it does furthers the international acceptability of the CSC in a number of jurisdictions and supports the foreign and trade policy of the United States.

Nuclear export waiver

Some observers have felt that the signing of the CSC might allow US President Barack Obama to issue a waiver under the US energy regulations which restrict US nuclear commerce with countries like India who have not signed and ratified the Nuclear Non-Proliferation Treaty. The presidential waiver would allow American companies like GE and Westinghouse to join their French and Russian counterparts in the race to build new nuclear reactors in the Indian market. Although American companies may want changes to the new Indian liability regime they may not wish to be left behind by the French and Russian competition. That India signed the CSC so close to the US President's visit to India this week may also be seen as an effort to give a fillip to the prospects for US nuclear commerce in India.

Indian motivation

The Indian government on the other hand, after analysing the situation, may also have felt that signing the CSC may allow it look like a good global citizen, and allow commercial negotiations to start between US and Indian companies. It is quite possible that the Indian government may have wanted to mirror domestic legislation to the CSC but was simply unable to do so due to domestic historical and political considerations. India may wish to postpone the issue of nuclear liability until later when commercial, government-to-government or legislative workarounds can be considered. India may also want to blunt any joint political pressure from Russia, France and the US, as it seeks to navigate various international restrictions on its nuclear programme.

Uncertain outcome

In general there are many good reasons for both India and the US to want India to sign the CSC. However, those reasons may not yet have much to do with India's nuclear liability regime. India signing the CSC is certainly symbolic in terms of India's continuing incorporation into the international nuclear framework. Whether it adds anything more than conviviality and political cover to ongoing discussions between the Indian government and various nuclear stakeholders remains to be seen.

Aboriginal Consultation and Accommodation: New Guidance from the Supreme Court of Canada (Rio Tinto Alcan Inc. v. Carrier Sekani Tribal Council)
By Max Faille

In its decision in Rio Tinto Alcan Inc. v. Carrier Sekani Tribal Council, released October 28, 2010, the Supreme Court has provided new guidance on key questions surrounding the duty to consult and accommodate Aboriginal groups. That duty, pursuant to the landmark Haida Nation decision in 2004, provides that the Crown must consult and in some circumstances accommodate Aboriginal interests whenever the Crown has real or constructive knowledge of the potential existence of an Aboriginal right or title, and contemplates conduct that might adversely affect it.

The salient issues addressed by the Court in the Rio Tinto case include (1) when the duty to consult is triggered; and (2) the role of administrative/statutory tribunals (such the B.C. Utilities Commission) in addressing Aboriginal consultation and accommodation issues.

Prior and Ongoing Breaches Do Not Trigger the Duty to Consult

The Court has clarified that the Crown's duty to consult and accommodate is not triggerred retrospectively to deal with prior, existing or ongoing infringements. The duty arises from new proposed Crown action with the potential for creating new adverse impacts. There must be a causal connection between the proposed Crown action and a novel potential impact on the Aboriginal claim or right. In this case, the approval of an Energy Purchase Agreement (EPA) between Rio Tinto Alcan and B.C. Hydro (an agent of the Crown) would not create any new adverse impacts in relation to land claimed by the Carrier Sekani Tribal Council First Nations. The adverse impacts, arising from flooding approved in the 1950s without consulting the affected First Nations to allow for a hydro-electric power generating plant, were historical as well as ongoing. These impacts remained to be addressed by way of a claim for compensation. However, the approval of a new EPA in 2007 did not alter those impacts and therefore did not trigger the duty to consult.

The Court stated:

The Court also stressed that "mere speculative impacts... will not suffice" and that there must be an "appreciable adverse effect on the First Nations' ability to exercise their aboriginal right."

The Court was careful to underscore that the type of Crown decision or conduct that can give rise to the duty to consult is not confined to those which have an immediate impact on lands and resources. The potential for adverse impact suffices, and this may include "strategic, high-level decisions." Examples given for such higher-level decisions included the approval of a multi-year forestry plan (Klahoose First Nation v. Sunshine Coast Forest District), establishment of a review process for a major pipepline (Dene Tha' First Nation v. Canada), the conduct of a comprehensive inquiry into a province's infrastructure and capacity needs for electricity transmission (Re B.C. Electricity Transmission Infrastructure Inquiry) . The Court expressly left open the question as to whether or not contemplated legislative action could give rise to a duty to consult.

The Duty to Consult and Administrative Tribunals

The Court has also provided guidance as to the proper role of administrative tribunals in relation to Aboriginal consultation matters. A degree of uncertainty has persisted in this regard: is the role of such bodies, as tribunals, to assess whether or not the Crown has met its obligation of consultation and accommodation, or, as emanations of the Crown, to conduct consultation and accommodation? The Supreme Court in Rio Tinto has ruled is that it may be either, or neither, and that the answer must be gleaned from the statute that creates the tribunal. In other words, it is open to Parliament or to the Legislature to confer either an adjudicative or a consultative role on an administrative tribunal in such matters, but that it must do so expressly or by necessary implication in the tribunal's governing legislation.

The Court noted:

The decision serves as a reminder that project proponents and private sector entities – particularly those engaging in resource development, real estate development and energy projects and transactions -- must always be mindful of the potential impact of the Crown's duty to consult and accommodate where there is the potential for an adverse impact on a claimed Aboriginal right or interest. Failure to get it right can lead to significant delays as well as potential litigation and reputational costs.

LDC Corner - OEB Issues Consultant's Report in connection with Review of Electricity Distribution Cost Allocation Policy
By Bernadette Corpuz

On October 20, 2010 the Ontario Energy Board (OEB) issued for comment a report (the Elenchus Report) by Elenchus Research Associates (Elenchus).

Background

On September 2, 2010, the OEB initiated a consultation on to review specific elements of its electricity distribution cost allocation policy. A cost allocation policy should reasonably allocate the costs of providing service to various classes of consumers, thereby serving as an important base for determining rates that are just and reasonable. Current policy is set out in the 2007 Report of the OEB: Application of Cost Allocation for Electricity Distributors (the 2007 Report). The 2007 Report set out the OEB's policies in relation to specific cost allocation matters for electricity distributors, most significantly the relationship between the class revenue and the class total allocated costs (the revenue-to-cost ratio). The 2007 Report also discussed the treatment of the monthly service charge, metering credits for the unmetered scattered load class, transformer credits for customer-owned transformers, and charges for the provision of standby power for customers with load displacement generation..

The scope of the current consultation is to determine the need for and nature of any update and refinement to specific elements of the OEB's cost allocation policy as follows:

1. To take into account the creation of the microFIT rate class;
2. To refine the following specific components of the cost allocation methodology:

3. To review options for allocating costs to load displacement generation;
4. To refine the three widest target ranges which are associated with the following rate classes: General Service 50 to 4,999 kW, Street Lighting, and Sentinel Lighting; and
5. To address accounting changes and the transition to International Financial Reporting Standards.

The Elenchus Report

The Elenchus Report discusses various options in respect of each of the items of review, in the context of the current situation, previously undertaken work, and issues identified by distributors and other stakeholders.

Elenchus provides a recommendation for each of the items under review, as follows:

Creation of MicroFIT Rate Class

The OEB should not create a separate MicroFIT rate class in the cost allocation model, but continue to use the currently identified Uniform System of Accounts to establish the uniform provincial fixed rate for microFIT. Each distributor should be allowed to establish its own microFIT rate to better reflect cost causality for each distributor.

Cost Allocation to Unmetered Load

A separate sheet should be added to the OEB's cost allocation model that will include the default values used for these types of customers. This would more clearly indicate to distributors the option of using their own values in place of the default values, and include descriptions of how the default values were developed. For distributors that do not have a separate class for Unmetered Scattered Loads, the distributor should be required to demonstrate that the revenue:cost ratio for these types of customers would still be within the OEB's recommended range.

Treatment of Transformer Ownership Allowance

The OEB should modify the cost allocation model to ensure that only the customer classes that include customers providing their own transformation are included in the determination of the Transformer Ownership Allowance.

Allocation of Miscellaneous Revenues

The major components included in Miscellaneous revenues should be identified and allocated to customer classes in a way that corresponds to the allocation of the corresponding costs. The remaining Miscellaneous revenues should be allocated to the customer classes in the same proportion as composite Operations, Maintenance and Administration costs.

Miscellaneous revenues and related costs should be included in the determination of revenue:cost ratios in the cost allocation model.

Weighting Factors for Services and Billing Costs

A separate input sheet should be developed that would include the default weighting factors. It should explain the reasons behind the different weighting factors and give distributors the option of substituting their own values for the default values, if appropriate.

Allocation of Host Distributors Costs to Embedded Distributors

Host distributors should continue to use Schedule 10.7 of the 2006 EDR Handbook and this schedule should be incorporated into the cost allocation model. The OEB should establish thresholds above which host distributors would be required to set separate charges for embedded distributors. The recommended thresholds are:

1. If the embedded distributor represents more than 10% of the host distributor's total volume sales, or
2. If the embedded distributor is larger than 500 kW average demand per month.

Allocation of Costs to Load Displacement Generation

Standby charges should be established for new load displacement generation above a certain size, for example 500 kW. The costs attributable to customers with load displacement generation should be determined by undertaking a specific customer avoided costs analysis. In lieu of a specific customer analysis, default avoided costs values could be used as a simplified approach. A simplified approach should also be followed to establish the benefits that load displacement generation may provide. For example, the OEB could choose, based on its own judgement, a 5% reduction in allocated costs.

Unless the distributor chooses to follow the above recommendation for existing standby charges, they should continue to be allowed to maintain on an interim basis their standby charges until more research has been evaluated on this issue, including rate design approaches.

Refine the three widest Target Ranges, which are associated with the following rate classes: General Service 50 to 4,999 kW, Street Lighting, and Sentinel Lighting

For the General Service class 50 kW to 4,999 kW, the top range should be reduced to 1.40. The bottom range should be left unchanged at 0.80.

For street lighting and sentinel lighting customer classes, the bottom range should be increased gradually over 3 to 4 years when distributors apply for rebasing, to match the bottom range of the General Service less than 50 kW class of 0.80. The top range should be left unchanged at 1.20.

Address accounting changes and the transition to IFRS

There is no demonstrated need to modify the cost allocation model to address the accounting reporting changes arising from the International Financial Reporting Standards.

Next Steps

The Elenchus Report provides a comprehensive, user-friendly basis upon which stakeholders can shape their positions on the development of the OEB's cost allocation policy. The OEB expects that any revisions to its cost allocation policy as a result of this consultation will be implemented in the 2012 year.

The OEB will host a stakeholder meeting on November 18, 2010. Participants will be able to discuss the Report with Elenchus representatives. Registration is requested by the OEB by November 4, 2010.

Written comments on the Report are due by December 2, 2010.

The Report can be found at:
http://www.oeb.gov.on.ca/OEB/Industry/Regulatory+Proceedings/
Policy+Initiatives+and+Consultations/Cost+Allocation+Policy#20101020.

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