Canada: Bill 13 - Alberta's Capacity Market

Last Updated: June 29 2018
Article by Michael Barbero and Gavin Fitch, Q.C.

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 case1 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?

Footnotes

1 ATCO Gas & Pipelines Ltd v Alberta (Energy and Utilities Board), 2006 SCC 4

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Michael Barbero
Events from this Firm
19 Dec 2017, Webinar, Calgary, Canada

McLennan Ross previously conducted a webinar on June 6, 2017 about the passage of Bill 17, during which we reviewed the changes to the Employment Standards Code and the Labour Relations Code. During that webinar, we identified a number of issues which would depend upon the language of the Regulations, which had not yet been developed.

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