Reopening energy contracts: Blend and extend is back

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on September 19, 2019

Climate change and how to combat it (or not) will likely be a key issue in this October’s federal election. Each of the six highest-polling political parties have put forth an environmental platform.

Generally, these platforms address the two leading sources of greenhouse gas output (GHGs): energy and transportation. They also acknowledge a tension between protecting the environment and boosting the economy and attempt to resolve it in various ways. The parties’ policies fall along an urgency spectrum of “do what we can” to reduce GHG emissions (with the exception of the People’s Party) to climate change is a “house on fire” crisis in Greta Thunberg’s words and we need to take radical measure to avert disaster.

In this two-part post, I review the environmental platforms of the People’s Party, Bloc Québécois, Conservative Party, Liberal Party, New Democratic Party and Green Party arranged from (in my view) least to most urgent. Each party’s climate change platform is polarizing depending on whether one believes a global crisis is imminent; whether Canada has a moral obligation to make specific reductions in GHG output or just to make reasonable efforts; and how much one is willing to give up to reduce one’s carbon footprint.

To put things in their scientific context, the 2018 Emissions Gap Report, published by the United Nations Environment Programme (UNEP), stated that while it is still currently possible to maintain global warming at below 1.5 to 2 degrees Celsius, it becomes less possible as time goes on and will become “extremely unlikely” if, by 2030, the gap between the required reduced level of GHG emissions and actual GHG emissions is not closed. (This is the gap referred to as the emissions gap).

To close the gap, global GHG emissions need to fall by 25 to 55 per cent by 2030. GHG emissions are actually trending in the wrong direction with global CO2 emissions increasing in 2017 after a three-year period of stability. Canada is the ninth highest emitter of GHGs in the world at 1.6 per cent, but among the top three emitters on a per capita basis.

People’s Party

To begin at the “least urgent” end of the spectrum, Maxine Bernier’s People’s Party is of the view that there is no scientific data supporting the conclusion that climate change is caused by human activity and that those who would say otherwise are alarmist and fear mongering. Under the People’s Party, Canada would withdraw from the Paris Agreement and largely abolish any green and environmental programs and incentives.    

Bloc Québécois

The Bloc Québécois’s environmental policies are comparatively thinner on detail than those of the other parties. The Bloc supports a carbon market and international agreements to restrict GHG output. It would provide tax incentives to support public transit and fuel-efficient vehicles and to convert heating oil to electricity (which only reduces GHGs where electricity is generated through renewable energy). However, without further details, it is difficult to fully assess the scope and degree of commitment by the Bloc to climate policies.    

Conservative Party

If one had to summarize the Conservative Party’s environmental and energy platform in two phrases, it would be: (1) getting the Trans Mountain expansion pipeline built, and (2) implementing environmental policies only where they also support the economic growth.    

With respect to the Trans Mountain expansion, the Conservative Party has taken the aggressive pro-pipeline stance to preserve and develop jobs and investments in Canada’s oil and gas sector. Specifically, a Conservative majority would repeal Bill C-69. To recap, Bill C-69, which came into force this summer, overhauled the environmental assessment scheme of federally regulated projects.

Among its other features, the new Impact Assessment Agency’s scope of review is broader to include a project’s long-term environmental, health, social and economic impacts and its impacts on Indigenous peoples. This legislation also facilitates public and Indigenous participation. Conservative leaders in western Canada generally decried Bill C-69 as the “Anti-Pipeline Bill” and killer of the oil and gas sector. Similarly, a Conservative government would also repeal Liberal restrictions on oil tanker traffic along the British Columbia north Pacific coast.

Taking the opposite approach to Bill C-69, Andrew Scheer commits to facilitating approvals for major projects that are declared to be “for the general advantage of Canada.” A Conservative government would pass legislation that would clarify the roles of participants in consultations and the parties who may participate to only experts and those directly impacted. One may assume that this will circumscribe the scope of public participation.

The Conservative Party’s environmental platform is set out in its A Real Plan to Protect Our Environment. First, Scheer’s government would repeal the Liberal carbon tax and replace it with a legislated cap on GHG emissions of 40 kilotonnes (kt) of CO2 (which is 10 kt of CO2 less than under the carbon tax).

Emitters in excess of the cap would be required to invest in green technologies. Emitters below the cap, meaning households and most businesses, would not be subject to carbon tax levies.

The Conservatives also offer a basket of other policies to support the development of green technologies, such as programs to fund and facilitate home and building retrofits and establishing a $1 billion private-public venture capital fund.

Second, the Conservative Party also commits to review, study and update various current key environmental policies, such as those on protected areas, waterways, wetlands, air quality, invasive species and plastic waste, and to work with provinces, municipalities, Indigenous peoples, plastic producers, sector-specific groups and other parties, although A Real Plan does not commit to any specific outcomes.  

Third, a Canada under Scheer’s leadership would focus on exporting green Canadian technology to other countries to help reduce foreign emissions. World leading green-tech Canadian companies would have access to favourable tax treatments and financing. The Conservative Party also proposes to launch a supporting “Canadian Clean” certification mark to identify green and clean products made in Canada.

While the Conservative Party’s platform acknowledges the importance of climate change, it has balanced the need to reduce GHG emissions with other economic goals. Generally, Canada under a Conservative government would only implement environmental policies where a case could also be made that that policy is a boon to the economy.

For those who view climate change as “do what we can” issue but not one that requires compromising other objectives, the Conservative approach may be ideal.

This is part one of a two-part series.

 On Monday, General Motors Canada announced that, by December 2019, it would be closing its 100-year-old auto manufacturing facility in Oshawa, Ontario, and laying off approximately 3,000 employees. This closure will cut deeply into the economies of Oshawa and Ontario. Oshawa willnot only lose thousands of jobs from its largest employer, but also a number of other jobs directly dependent on the manufacturer’s presence (the Ontario Federation of Labour multiplier estimates nine non-GM jobs lost for each GM job).  .   

A variety of factors are being blamed for the shut down: (a) American protectionism: approximately 90% of the cars produced at the Oshawa plant are exported into the United States. Uncertainty around American tariffs on cars manufactured outside of the U.S. under the new United States-Mexico-Canada Agreement incentivized  General Motors Company (GM) to reduce manufacturing outside the U.S.; (b) Canadian environmental policies: the recently-enacted Canadian federal carbon tax will drive up manufacturing costs; and/or (c) changes in consumer preferences: consumer demand for large sedans, like the Chevy Impala and Cadillac XTS models made at the Oshawa facility, is declining. The Oshawa facility has been operating at less than half capacity for the last few years.  

GM itself has described these closures as part of a global transformation strategy to move away from large, GHG-emitting vehicles towards electric and autonomous cars and to use technology to better streamline production.  GM contemporaneously announced the closure of four other plants in Michigan, Ohio and Maryland, and three more outside of North America. The closures will result in the laying off of 15% of GM  employees with expected savings of $6 billion by 2020. 

GM’s CEO Mary Barra stated that, “we are in the midst of a transportation revolution”, and that GM envisions a near future where all cars are electric, self-driving and interconnected – a future of “zero emissions, zero crashes and zero congestion”. In the next four to five years, GM announced intentions to offer 20 different models of electric cars. Like GM, other car manufacturers have similar projects underway that focus on electric and self-driving cars. 

The political response to the GM closures has been mixed. There have also been calls for political leaders to look for ways to induce or force GM to maintain the status quo. The day after GM made its announcement, President Trump tweeted about the facility closures in the United States: “Very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland…..We are now looking at cutting all @GM subsidies, including for electric cars.” In Ontario, Premier Doug Ford cited the plant closure as an example of the federal carbon levy [*pls link to my article] driving up manufacturing costs and killing jobs. He called on the federal government to repeal the tax. The federal reaction was more accepting of the closure, with Prime Minister Trudeau tweeting disappointment and a note that Ottawa would help affected families “get back on their feet”.  

If we are, as Mary Barra says, in the midst of a revolution in the auto sector, then now is a critical time for policy leadership in response to this titanic shift. There are going to be many different policy challenges that both the federal and provincial governments will need to address. Canada’s transportation infrastructure will need an extensive charging infrastructure to support the anticipated wave of electric vehicles. On the flip side, an all electric future will eliminate the need for gas stations, and we will need to consider how gas stations and the gas supply chain should be repurposed. Autonomous, self-driving vehicles will eliminate much of the need for parking which will free up central real estate for other uses. Most important, however, Ottawa and Queen’s Park need to consider and address head on how it will respond to jobs lost to automation and changes in technology.  

If GM is right, then there are seismic changes on the horizon for the auto sector, and consequently on our economy and society. The right policies and incentives will be critical in preparing the Canadian economy for the future. 

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on November 5, 2018. 

In the 2015 Paris Agreement, Canada committed to take steps to maintain global warming at no more than two degrees Celsius than pre-industrial levels, and to aim for a target of 1.5C. As a result, the federal government and the provinces in consultation with First Nations developed the Pan-Canadian Framework on Clean Growth and Climate Change to, among other things, price and reduce carbon emissions.

A key component of Canada’s GHG emissions reduction plan is the Greenhouse Gas Pollution Pricing Act (better known as the federal carbon levy or the carbon tax or the federal backstop) which received royal assent in June 2018. This act puts a price on carbon — specifically $20 per tonne in 2019, rising by $10 per tonne to $50 per tonne in 2022. 

To give some context, burning one litre of gasoline produces 2.3 kilograms of carbon dioxide. Using an 80-litre tank of gas produces approximately 184 kg of carbon emissions. To put it another way, every 5.5 times one fills up one’s tanks of gas, one has produced about a tonne of carbon dioxide. (The reason why the carbon emission produced weighs more than the gasoline that produced it is that during combustion the carbon in the gasoline combines with oxygen in the air to produce carbon dioxide. The additional weight comes from the oxygen molecules.) A tree processes a fraction of that: one tree absorbs about 21.8 kg of carbon dioxide per year.

The federal carbon levy is a “backstop”: it applies only in those provinces that have not implemented their own comparable system for pricing carbon. In late October, Prime Minister Trudeau announced that the federal carbon levy would apply in Ontario, Manitoba, New Brunswick, Saskatchewan, Yukon and Nunavut beginning in 2019. (Several provinces are challenging the constitutional validity of the federal carbon levy. This issue remains to be determined by the courts, although general thinking appears to be that the federal carbon levy act does fall within federal jurisdiction and is validly enacted.)

The principle underlying the federal carbon levy is “polluter pays” in that the person or organization producing the carbon pays for preventing or managing the environmental, health and social costs of pollution, instead of socializing the costs of greenhouse gas emissions and resulting climate change.

The basic mechanics of the federal carbon levy is a charge that is imposed in one of two ways.

Fossil fuel charge: The first way is a per unit charge on fossil fuels, which includes gasoline, natural gas, propane and coal, among other things. For example, the levy on gasoline will be $ 0.0442 per litre beginning on April 1, 2019, and rising to $0.1105 per litre by March, 2022. The levy on an 80-litre tank will be $3.54 rising to $8.84. The levy is to be paid by fossil fuel producers and distributors. End-use consumers will not be directly responsible for paying the charge, but we can expect that those additional costs will be passed on by distributors and producers to consumers. There are special rules for fuel used in international commercial transportation, as well as for specific activities like farming.  

Output-based pricing for certain covered industries: The second method is the output-based pricing system (OBPS). The policy reason for creating this separate second method is to encourage specifically prescribed, emission-intensive industries (including electricity generation using fossil fuels, auto manufacturing, processing of certain foods, pulp and paper production, chemical production, oil and gas processing, iron and steel production and many other industrial processes) to reduce GHG emissions, while at the same time ensuring that the compliance costs do not hurt market share and competitiveness. The federal government has indicated that it may prescribe additional industries in the future.

Within these covered industries, the OBPS method applies only to producers that emit over 50,000 tonnes of greenhouse gases per year. (Producers that emit between 10,000 and 50,000 tonnes per year are expected to have the option of opting in to the OBPS beginning in 2020.) Fuel for facilities that are part of the OBPS is exempted from the fuel charge. The federal government expects that the OBPS will apply to approximately 133 facilities in backstop jurisdictions.

The federal government will set a GHG emission standard per production unit benchmarked to the national average emission intensity. For example, for pulp and paper producers, there will be a standard CO2 emissions per tonne of finished product. The emission intensity standard is expected to be set at 80 per cent of the national average emissions intensity (i.e., 20 per cent less than the average emissions intensity).

The government has indicated that it would adjust this percentage in light of in specific cases. For example, the cement, iron and steel, lime and nitrogen fertilizer industries were determined to be trade-exposed, and so this standard was relaxed to 90 per cent of the national average emissions intensity to maintain competitiveness. The expectation is that the emission intensity standard will become more stringent over time.

Each OBPS-registered producer will have an annual emission limit calculated based on the emission intensity standard and their total production. Producers that emit more than the standard emission intensity will be required to either pay the carbon charge ($20 per tonne in 2019 increasing to $50 per tonne in 2022) or to submit surplus compliance credits or offset credits to cover their excess emissions. Conversely, producers that emit less than their calculated annual emission limit will receive credits that they can sell or trade.

The federal government has committed that proceeds from the federal carbon levy will be given back to residents of the province in which they were collected in the form of rebates, incentives and investments in GHG-reducing technologies and infrastructure.

The federal carbon levy takes effect in 2019. Administratively, there is a lot of work to do over the next few months. Producers and distributors are required to register with the minister of national revenue. Covered facilities are required to register with Environment and Climate Change Canada and prepare compliance reports.

Detailed requirements on how emissions will be quantified and verified need to be developed, and the service providers need to make such services available. A system for tracking, managing and trading compliance credits needs to be developed.

There is a constitutional challenge on the validity of the legislation to be survived. Things will move fast over the next few months. Producers, distributors, emitters and industries should be prepared to respond quickly to ensure that they know how this new regime works and have met their compliance obligations and are taking full advantage of its opportunities.

The new carbon pricing environment also opens up new opportunities and reasons to invest in clean tech, reduce compliance costs, manage GHG output and perhaps even have a net benefit.

We will stay on top of new developments and keep you posted.         

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on September 28, 2018. 

Bill 34, the Green Energy Repeal Act, received most of its attention as the bill that would undo the Green Energy Act. Importantly, however, this bill also contains provisions indicating the new government’s policy direction for energy conservation and demand management (CDM). In this article, I briefly outline the history of conservation in Ontario, where we are now and what conservation might look like under Bill 34.

History of conservation in Ontario

Historically, energy conservation policies existed to varying extents under Ontario Hydro, but it remained less important than generation when it came to determining how the province would be powered.

In 2011, Ontario launched the 2011-2014 CDM Program, a large scale, comprehensive province-wide energy conservation and demand management program. It was a significant achievement as one of the first large-scale, comprehensive conservation programs in the world mandated to achieve significant reductions in electricity consumption. 

This program offered incentives to homeowners, businesses and large industrials to take measures to reduce their energy consumption, such as replacing incandescent light bulbs with CFL or LED bulbs or shifting their energy consumption to times when there was more surplus electricity available. The consumer programs were marketed under the “saveONenergy” brand. Some of these programs built on former Ontario Hydro programs or existing local distribution company programs.

The province implemented the 2011-2014 CDM Program through the Ontario Power Authority (OPA, now the Independent Electricity System Operator or IESO) working together with local utilities. These programs were funded through the electricity rates.

After 2014, the ministry again directed the OPA to renew, improve and re-launch CDM in the form of Conservation First, delivered by the local distribution companies and funded by the OPA, again through electricity rates. The title, Conservation First” indicated that conservation was the first resource that the province should turn to for its energy needs as the one that was least costly and most efficient to implement. These CDM policies and others like it were cornerstones of the Green Energy policy.

What conservation has accomplished 

The IESO has recently reported on the success of Conservation First and earlier CDM programs citing the fact that since 2006, “Ontarians have saved more than 68 billion kilowatt-hours through their conservation and energy-efficiency efforts — about the same amount as Toronto-area customers would consume in two and a half years.” (Power Perspectives, Today’s Challenges, Tomorrow’s Opportunities, 2018, published by the IESO.)

Under the terms of its original direction from the government, Conservation First comes to an end in 2020. In Bill 34, Premier’s Ford’s government is signalling what the next iteration of CDM policy in Ontario might look like.

Bill 34

Part II.3 of Bill 34 contains the provisions that authorize the lieutenant governor to make regulations creating energy conservation permissions and requirements for and on individuals, businesses and the public sector in Ontario, some of which have similarities with the to-be-revoked regulations under the Green Energy Act. While exactly whom this bill would affect, what they would need to do and how much efficiency would be achieved will be in the regulations, this bill does set up the framework for future CDM policies. The authorizing provisions include:

• CDM-specific goods, services and technologies: The province may designate certain goods, services and technologies as ones that promote energy efficiency. Items with this designation can be used even if there is a municipal law, condominium by-law, contract or  encumbrance preventing its use. For example, if a clothesline is a designated good and a condominium by-law prohibited the use of a clothesline, one could still hang a clothesline on their balcony.
• Renewable energy projects: The province may designate certain renewable projects for specific purposes such as promoting renewable energy or promoting transmission system and distribution system access. Projects so designated may proceed even if contrary to a municipal law, condominium by-law, contract or encumbrance.
• CDM plans for public agencies: Public agencies (including ministries and municipalities) may be required to submit plans outlining how they will reduce energy consumption and to reduce their energy consumption by specified targets. The Government has the ability to prescribe the CDM methods and other requirements for implementing the CDM plans.
• Reporting and CDM plans for “prescribed persons”: The Government may designate “prescribed persons” in the regulation. It is as yet unclear who this might be, but can potentially be any business, industry, sector, entity or conceivably even individuals. Such prescribed persons will need to report energy and water consumption against performance metrics. Prescribed persons may also be required to prepare CDM Plans.
• Prohibition of inefficient appliances or products: Any product or appliance that does not meet regulated efficiency standards cannot be sold or leased in Ontario.
• Access to energy data: Energy providers must make energy consumption data available to consumers.

We will continue to monitor the progress of this bill and any regulations that may be made under it.

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on June 25, 2018. 

On July 16, 2018, the Ontario government tabled Bill 2, the Urgent Priorities Act. This bill targets two energy companies to cause two very specific actions: 1) To give the province significant authority over executive compensation at Hydro One; and 2) To terminate the White Pines Wind Project. (The third part of the bill relates to ending the strike at York University which I do not discuss in this article.)

Executive compensation at Hydro One

Following the resignation of Mayo Schmidt, the CEO of Hydro One, and the board of Hydro One, the Hydro One Accountability Act would give the province significant authority over executive compensation until Jan. 1, 2023. It requires Hydro One to consult with the province and its five major shareholders in establishing the executive compensation framework, which then requires approval from the management board of cabinet to take effect.

The management board of cabinet would now have the power to direct Hydro One as to the process and content of the framework, including capping compensation payable. Finally, the Act specifies that executive compensation cannot be charged to electricity ratepayers. It will need to come out of some other revenue source.

The section then goes on to absolve the Crown and Hydro One from any liability that may arise as a result of this Act, including under any securities laws or as a result in any decreases in Hydro One’s share price. The section also bars the enforcement of any foreign judgments or orders that might be brought by investors outside Ontario.

At the time of Hydro One’s privatization, it was conceived of as a private entity which would not be used to implement policy. In fact, the province and Hydro One entered into a governance agreement to ensure that the province stayed in its role as shareholder and did not try use its majority shareholding to implement policy.

This bill is significant because it signals a willingness on the part of the government to use its legislative powers to intervene in the internal affairs of a large Ontario infrastructure company that is privately governed. Depending on how much one is willing to read into this bill as representative of the government’s views generally, this government may be of the view that large infrastructure companies that have a significant impact on the public should be more subject to regulation and oversight.

Termination of the White Pines Wind Project

The White Pines Wind Project was originally planned to be a wind farm made up of 27 wind turbines in Prince Edward County. The project has been underway since 2010, when it received one of the first Feed-in Tariff contracts (FIT contract) in which the Ontario Power Authority (now the Independent Electricity System Operator or IESO) agreed to purchase the power produced at a set prices. The wind farm faced significant opposition from local residents and the project was scaled down to nine turbines. Just prior to the election, the project received permission from the IESO to commence construction. The project was owned by wpd Canada which is a subsidiary of wpd Europe, headquartered in Germany.

The White Pines Wind Project Termination Act, 2018 terminated this project’s FIT contract and revoked its permits and approvals retroactive to July 10, 2018. The legislation also deemed terminated the agreement between the IESO and the project lender, in which the IESO acknowledged the lender’s right to take over the FIT contract if wpd Canada defaulted on its borrowing obligations. The legislation went on to require wpd Canada to decommission the project and return the land to its original state.

Significantly, the bill then legislates away wpd Canada’s rights to compensation under contract law, replacing it that with the amount prescribed in the bill. The prescribed compensation amount is essentially (i) its costs plus (ii) its break-fees to its lenders minus (iii) the value of its assets. (There is some discretion for the lieutenant-governor to adjust or cap the amount.)  

As with the Hydro One Accountability Act, the bill then goes to great lengths to extinguish any kind of liability on the Crown or the IESO. Under the theory of parliamentary sovereignty, the traditional view is that the legislature can, with appropriately clear and specific wording, not only terminate a contract, but also absolve the Crown or anyone else, from liability for that termination. The principle behind parliamentary sovereignty is that the legislature is supreme, and the courts do not see their role as second-guessing the legislature’s policy choices.

The clear message here is that the government is going to use legislation as a blunt instrument to deliver on its election promises — even if that means overriding a private party’s contractual rights. While the government has always had the right and the ability to do so and has done so in the past, this power has been used with restraint. (By way of comparison, when the Ontario Power Authority cancelled two contracts to build gas plants in Oakville and Mississauga in 2010 and 2011, the legislature did not legislate away the province’s liability to the counterparties for damages under contract law.)

Where the legislature amends a contract through legislation, it undermines the credibility of a government contract: Anyone thinking of entering into a contract with a public body will take note of the fact that that public body can change its mind at any time and get out of the contract without liability. White Pines is an example of the tension between the desires of the public as expressed in an election versus private contractual rights. We are seeing a new government that is much more willing to push the boundaries and come down on the side of the electorate’s desires.

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on June 18, 2018. 

Before he was elected, Ontario’s premier-designate Doug Ford published his vision for Ontario, “For the People, A Plan For Ontario,” and the portion that relates to energy can be divided into five main promises:

1) Fire the board and CEO of Hydro One, and reduce the salaries of Hydro One and Ontario Power Generation (OPG) executives;
2) Repeal the Green Energy Act (Ontario), cancel energy contracts that are in the pre-construction phase, re-negotiate other energy contracts and declare a moratorium on new ones;
3) Move the costs of conservation programs to the tax base and out of the electricity rate base;
4) Stabilize industrial electricity rates through aggressive reforms; and,
5) Do away with the new cap-and-trade regime and any regime for pricing carbon emissions in Ontario.

I dealt with part one of this two-part series in “Doug Ford vs. Hydro One brass.” I will address the others here.

As I noted in an  “The Ontario election: possible impact on energy projects,” a new government has the unfettered ability to repeal policy implemented by a previous government. Theoretically, therefore, there is nothing preventing a Conservative majority from repealing the Green Energy Act (Ontario). Many of the later energy contracts  —  including the Feed-in Tariff Contracts and the Large Renewable Procurement with the Ontario Power Authority (now the Independent Electricity System Operator, or IESO)  —  give the provincial entity the right to terminate those contracts upon payment of a termination fee.  

It is more interesting to consider how a new government might seek to reopen earlier, existing energy contracts.

Where a provincially created entity like the IESO has entered into a contract, those contract terms are legally binding on that entity, just like they would be on any other commercial party. It would be a breach of contract if the provincial entity were to try unilaterally to alter any of those contractual terms and doing so could make the provincial entity liable for breach of contract.

If the province seeks to renegotiate the contract price of some of the renewable energy contracts, the province will need to get the counterparties to the table, which is typically done by offering the counterparty some sort of inducement. In such a case, any reduction in the contract price would need to be offset by some other equally attractive benefit to the project developer.

How would the costs of conservation be moved to the tax base?

Conservation and demand management programs are now largely funded through electricity rates. A Plan for Ontario estimates this cost at $433 million per year. Ford has indicated that these costs would now be taken out of the electricity rate base and paid for through the tax base.  

This policy change has been relatively uncontroversial and is essentially just a shift from one public revenue base to another largely overlapping base. Because the tax base is tiered based on income, the shift will result in reducing the burden of conservation costs on those with lower incomes and shifting it to those with higher incomes.

How would industrial electricity rates be stabilized through aggressive reforms?

The PC party has provided little guidance on what reforms are contemplated and how industrial rates might be impacted. We will need to wait until the new government specifies exactly what it intends to do.

Can the new government do away with carbon pricing in Ontario?

Beginning on Jan. 1, 2017 Ontario implemented a cap-and-trade program on greenhouse gas emissions (GHGs). Under that program, the tonnes of GHGs that businesses and industrials can emit is capped by regulation, and a market was created in which allowances can be traded by emitters who either have spare allowances or need more. Part of Ford’s plan includes scrapping the cap-and-trade program in its entirety. In place of carbon pricing, the PC platform contemplates a fund to invest in emissions reduction technologies in Ontario.  

As noted above, a new government is free to repeal any act implemented by a prior government under the doctrine of parliamentary sovereignty. However, if Ontario’s cap-and-trade program were to be repealed, the backstop federal carbon-pricing program under the proposed federal Greenhouse Gas Pollution Pricing Act would take its place.  

The federal government sets minimum standards for a provincial carbon reduction program. For carbon-pricing systems, this includes a set price of $10 per tonne in 2018 rising to $50 per tonne in 2022. For cap-and-trade systems, it sets: (i) a 2030 emissions-reduction target of at least 30 per cent, and (ii) increasingly stringent emission caps to at least 2022. Where a province does not meet the minimum standard (by, for example, having no carbon regime), the federal carbon-pricing system would take effect.

Ford has indicated that he would challenge the federal government’s ability to impose its carbon-pricing system in Ontario. While a detailed review of the likelihood of the success of such a constitutional challenge is outside the scope of this article, the basis of it would likely be a division of powers argument: the pith and substance of imposing a carbon-pricing scheme on the provinces does not fall within one of the heads of power granted to the federal government under the Constitution Act, while the federal government would argue that it does.

Ford and the new PC majority have a tremendous ability to reshape the energy market in Ontario and appear highly motivated to do so. With respect to his specific promises, some may be immediately achievable.

Others may need to be determined by the courts, through significant negotiations with contract counterparties, or are still subject to further consideration as the new government takes shape. One thing is certain: the energy market in Ontario will need to ready to deal with the prospect of fundamental change for the first time in a long while.

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on June 11, 2018. 

On June 7, Doug Ford received a strong mandate from Ontario voters to implement his vision for the province.

The portion of that vision that relates to energy — outlined in the Progressive Conservative Party’s “For the People, A Plan for Ontario” released just before the election — can be divided into five main promises:

(1) Fire the board and CEO of Hydro One, and reduce the salaries of Hydro One and Ontario Power Generation (OPG) executives;
(2) Repeal the Green Energy Act (Ontario); cancel energy contracts that are in the pre-construction phase; renegotiate other energy contracts; and declare a moratorium on new ones;
(3) Move the costs of conservation programs to the tax base and out of the electricity rate base;
(4) Stabilize industrial electricity rates through aggressive reforms; and,
(5) Do away with the new cap-and-trade regime and any regime for pricing carbon emissions in Ontario.

Now that Ford is premier-designate, how might he deliver on these promises when he takes office on June 29? In this first of two parts I will look at Ford’s plans for Hydro One. I will address the others in part two.

Can Ford fire the board and CEO of Hydro One?

When Ontario Premier Kathleen Wynne announced in the fall of 2015 that the province would sell up to 60 per cent of Hydro One, it was highly controversial. And it remains a political lightning rod today.

The sale was completed in three tranches (the last of which took place in May 2017). It raised over $9 billion in proceeds to pay for provincial infrastructure projects and to reduce provincial debt. The province now owns just under 50 per cent of the shares in Hydro One with the balance held by private investors, including investment funds, First Nations and OPG.

Hydro One is incorporated under the Ontario Business Corporations Act and is governed by that Act and the Electricity Act (Ontario). Hydro One also has a governance agreement in place with the province that, among other things, is intended to ensure that the province sticks to its role as shareholder and does not interfere in Hydro One’s management or seek to implement policy through its majority shareholding.

The board alone is responsible for the management and affairs of Hydro One. Under the governance agreement, the province may nominate up to 40 per cent of the directors. Once on the board, however, the directors must act with a view to the best interests of Hydro One (and not of any one particular shareholder). Whether the level of compensation Hydro One pays its directors, CEO, executives and employees is necessary to attract the best talent and whether doing so is in the best interest of Hydro One are fact-specific questions that the board will need to wrestle with and ultimately determine.

The province does have the ability to trigger the removal of the full board under the governance agreement, excluding the CEO. The province may do so by notifying Hydro One that it is calling a shareholder meeting to remove the directors. The province could then nominate replacement directors who it believes would be inclined to lower levels of executive compensation and salaries. But what the board cannot do is take directions from a shareholder, even if that shareholder nominated and elected its members.  

Accordingly, while the province does have some indirect ability to influence compensation levels and to shape the constitution of the board, it does not have the ability to do anything so direct as set salaries or fire the CEO.

This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on Tuesday May 29, 2018. 

As was the case in the last two Ontario provincial elections, energy policy is again a central issue in 2018.

The incumbent Liberals pledge to stay the course on a green, low carbon economy, with over $4 billion in proposed carbon market investments.

The PC Party has indicated it intends to make sweeping changes, including: (i) repealing the Green Energy and Green Economy Act (Ontario) and the cap-and-trade program (and even possibly challenging the federal regime that would take its place), and (ii) declaring a moratorium on new energy contracts or even cancelling existing contracts where construction has not yet begun.

The NDP promises to continue with a renewables policy and a carbon pricing program. Andrea Horwath has also indicated that, if elected, the NDP would buy back Hydro One.

Over the past 15 years, Ontario energy policy has focused on renewable energy, conservation and demand management and the reduction of greenhouse gas emissions. Some policies, like time-of-use pricing, are open to all households and small businesses who adjust their consumption to take advantage of it. The Industrial Conservation Initiative is also open to all qualifying large and certain other qualifying electricity consumers; by reducing their consumption during peak periods, they receive a discount off their electricity bill.

In other policy instruments, the province has directed the Independent Electricity System Operator (IESO, formerly the Ontario Power Authority) to enter into contracts with private counterparties to build energy projects, primarily renewable. Under these contracts, the IESO provides payments to a project, typically supporting project revenues over a long-term period, typically 20 years.

Doug Ford’s statements about the potential reverses in energy policy have quite understandably caused uncertainty: can the government take away an energy program or renege on a contractual commitment?  

Generally speaking, a government has the freedom to change course on policy implemented by a previous government or by itself. It can also amend or repeal any currently in force legislation. Under the doctrine of parliamentary sovereignty, a government is free to legislate as it chooses subject only to constitutional limitations. Further, without specifically changing policy, a government can dramatically alter the effectiveness of a program by increasing or reducing its funding.

That said, where a provincially created entity like the IESO has entered into a contract, and where the government makes a policy change that results in that entity terminating that contract, that entity can, like any other commercial party, be liable for breach of contract and damages. Whether a contract has been breached and damages have been suffered is a context-specific analysis that would have to be determined in accordance with that contract’s terms.

Energy contracts in Ontario contain terms that are particularly relevant to a government looking to make changes in energy policy:

• Termination for convenience clauses: Some later power contracts give the IESO a without-cause right to terminate. For example, the IESO may terminate Feed-in Tariff (FIT) 2, 3, 4 and 5 Contracts at any time before the IESO has issued a notice to proceed to the project developer (this right was waived for FIT 1). The IESO is obligated to compensate the developer for pre-construction costs up to a specified amount. The Large Renewable Procurement I also permits the IESO to terminate the contract prior to the project reaching commercial operation. If termination occurs after the developer has secured its approvals and financing, the IESO is obligated to pay a termination payment that includes an equity return up to the termination date and a debt breakage payment. In neither case, however, is the project developer entitled to lost profits under the contract or lost opportunity costs. Theoretically, the project developer and lender were made fully aware of the potential for contract cancellation and factored this into their project price.

• Discriminatory action clauses: Ontario power contracts typically also contain discriminatory action clauses protecting project developers. These provisions are triggered if the Legislative Assembly passes a law or amends the power contract in a way that increases the project’s costs. The discriminatory action provisions generally require the IESO to return the project substantially to its prior economic position. Another feature of many Ontario energy contracts is a robust change in law clause that spells out how parties will deal with changes in electricity market mechanisms and rules.

It is most likely that if a new government terminates or amends any power contracts, it will take place using the mechanisms of one or both of these types of provisions.

It should be noted that, even if a project developer would be entitled to damages for breach of contract by a statutory entity, the legislature does have authority to “legislate away” such payments. With required “clear and specific language,” the legislature can not only cancel a contract, but absolve itself or any of its entities of liability for breach.

As a practical matter, however, such a step would need to be weighed against the message it would send to project developers and their lenders that provincial contracts may not be as “iron clad” as generally thought. In the long run, developers and lenders would be deterred from investing in provincial infrastructure or would demand higher returns for doing so. Such a move could lead to higher electricity prices or generally higher costs of capital for the province in the long run.

Until the results of the election are known and campaign platforms become policy, it is impossible to predict what specific changes might be made to Ontario’s electricity market. However, one thing that is certain is that participants in the energy market — and their counsel — will be eagerly monitoring the June 7 results.

Policy makers federally and in Ontario view the development of smart grids as an essential part of Canada’s future, clean low carbon infrastructure and economy. Budget 2017 (Canada) indicated that $820 million in funding would go towards green infrastructure projects, including an NRCan program for developing smart grids.  Ontario’s 2017 Long Term Energy Plan included among future policy goals that the Province would continue to build on smart meters and invest further in smart grids. 

These policy statements are being implemented through the Ontario Minister of Energy’s October 25, 2017 directive to the Ontario Energy Board which contained a mandate to examine opportunities for smart grids, as did the directive to the Independent Electricity System Operator (IESO) of the same date.  The IESO’s Putting Ontario’s Long Term Energy Plan into Action (January 2018) stated that the IESO will seek renewable distributed energy resource (DER) projects that work with smart grid and other technologies. 

A smart grid is a system of distributing electricity (a grid) that is able to sense and then to respond dynamically to load, generation and other grid events. A grid is “smart” because it is equipped with technology that allows for two-way digital communication among grid users, such as smart meters and other advanced metering infrastructures, and with automated systems that give the grid the ability to respond to the information it receives, such as smart inverters, DER Management Systems (DERMS) and advanced distribution management systems (ADMS). By connecting a generation or energy storage asset, a smart grid can do more to balance generation and load and to provide other services for grid stability and regulation. 

Policy makers’ focus on smart grids makes a lot of sense and the benefits of evolving the current systems into smart grids appear to be enormous: 

Asset Use and Efficiency – a smart grid makes more efficient use of the existing assets. For example, on a bright sunny day a smart grid will choose solar power as the power source to meet local demand instead of a power source that relies on more costly, GHG-emitting fossil fuels, like a gas plant. Or a smart grid might dispatch on a local power source to meet local needs and so reduce line losses and system wear. Meeting local demand through local generation has an additional benefit to the electricity system in that it reduces congestion on the Province-wide transmission system. Generally, by making better use of energy resources, smart grids are expected to reduce the costs of providing electricity and therefore consumer costs. 

Increased Penetration of Renewables and Reduced GHG Emissions – As in the above example where a smart grid calls on a solar farm to provide electricity on a sunny day, smart grids are generally anticipated to make more efficient use of renewables (such as solar, wind and hydro) and storage technologies. A smart grid will first dispatch renewables where they are able to generate in lieu of a power source that emits GHGs. Renewable power becomes more economical and GHGs are reduced. 

Reliability – A smart grid has the ability to sense and to respond dynamically to incidents and to manage bidirectional power flow over the grid. For example, a smart grid will be able to balance supply and demand by working with local load and generation. This ability is expected to improve the quality of the power delivered to consumers, and is also anticipated to allow a smart grid to recover from incidents more quickly and generally to reduce outages. 

Encouraging Prosumers – A prosumer is an electricity consumer who also produces electricity.[1] The classic prosumer example is a homeowner who also generates electricity through rooftop solar panels. In order to develop a market for prosumers, the electricity system needs to have the required “smart” infrastructure in place, such as meters that allow the prosumer to sell electricity back into the grid, and an information system that gives prosumers real-time price signals. A smart grid will provide much of the supporting infrastructure to transform consumers into prosumers. 

The EDA and the Role of the LDCs - The Electricity Distributors Association (EDA) has mapped out a vision for smart grids in Ontario in the EDA’s February 2017 publication, The Power to Connect. Local distribution companies (LDCs) are well positioned to develop smart grids for their service territory. In this model, a local smart grid becomes a vibrant market where consumers, large and small generators, the IESO and other third parties work together to deliver electricity in the most efficient and stable way as enabled by the LDCs. The EDA has called for a regulatory environment that will encourage LDCs to invest in smart grid enabling infrastructure and assets. 

At the same time, a wide-spread rise of smart grids will also create challenges:  

Cybersecurity – As electricity grids become increasingly digitized and automated, they also become more vulnerable to cyber risks, attacks and privacy breaches. Hand-in-hand with the development of smart grids, cyber security technologies, practices, policies and training will also need to advance to ensure their secure operation and risk mitigation. 

Stranded Assets – One of the benefits of the smart grid is also one of its drawbacks. An efficiently operating smart grid means that electricity consumers will rely less on existing infrastructure and assets or will use them differently. For example, instead of needing a constant supply of electricity from the Province-wide grid, a smart grid might be able to operate for much of the time independently and turn only to the larger system where it cannot meet its own needs. The problem with reduced or sporadic electricity infrastructure use is that such assets and infrastructure were built with the expectation that they would be in constant, high volume use and their pricing models are based on that type of use. Where those infrastructure and assets are used less frequently, investors (whether the ratepayer or private) will not see the returns on those investments that they had expected. 

The EDA has explored methods of compensating for stranded assets in The Power to Connect (at p. 37). It advocates a fixed charge to cover the costs of the larger infrastructure, as the Ontario Energy Board has already done for residential customers, or a use fee for self-generation. The EDA encourages exploring other business models and ways of earning revenue to ensure that parties are encouraged to adapt to the changing grid. 

Balancing the Larger Grid – Finally, another significant challenge is that the IESO and the localized smart grids must work together to keep the broader Province-wide electricity system stable in face of the less predictable needs of the smart grids.

With its benefits and challenges, smart grids will be part of the future of the Ontario energy landscape. We will monitor developments in this space.10-Apr-18