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Jageman Law Energy Blog

 

By Caroline Jageman and Michael Killeavy 


This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on January 8, 2020.  


Last year was very eventful for those practising in the energy sector. There have been some very important legal and policy decisions around carbon emissions and the Feed-in Tariff (FIT) program that will continue to have an impact into the new year. This is the first part of a two-part article where we discuss three other key cases to watch in 2020.


In part one, we discuss a challenge to the Independent Electricity System Operator (IESO) market rules and the revocation of a necessary permit to build a wind farm. In part

two, we will discuss a constitutional challenge to Ontario’s Global Adjustment Mechanism.


Challenging Market Rules


Major consumers market rule challenge Since 2015, the IESO has run a Demand Response Auction in which heavy consumers of power such as industrial consumers

are paid a fee to be on standby, and, if the Ontario electricity grid nears peak capacity, to reduce their consumption of power.  The IESO runs a reverse-auction for participants in this program. Large consumers of electricity participate in this auction. They bid in the hourly rate for which they would be willing to reduce their electricity consumption.


On Sept. 5, 2019, the IESO published a series of amendments to the Demand Response Auction rules, which are intended to transform the Demand Response Auction into the Transitional Capacity Auction (TCA) by expanding participation to electricity generators. With respect to generators, when the electricity grid nears peak capacity, generators produce power to supply into the grid. From the grid’s point of view, there is no difference between reducing a load’s consumption of power and injecting power into the grid.


On Sept. 26, 2019, the Association of Major Power Consumers of Ontario (AMPCO) filed an

application with the Ontario Energy Board (OEB) to review the proposed TCA amendments. The AMPCO application alleged that the inclusion of electricity generators is unjustly discriminatory against traditional load participants and inconsistent with the Electricity Act.  Electricity generators will receive both the standby payment and, in addition, will also be paid for the electricity they supply into the grid. Loads will only receive the standby fee.  


As part of its application, AMPCO asked the OEB to stay the operation of the  

TCA amendments, which would effectively shut down the TCA for 2019, originally

scheduled to be held Dec. 4-5, 2019. The OEB has broad powers to stay an amendment, if

it is in the public interest, and based on the merits of the application among other reasons.  On Nov. 25, OEB issued the stay, effectively agreeing with AMPCO and preventing the TCA from taking place until the OEB can decide on the merits of the application. 


The OEB found that there was a serious issue to be adjudicated and that the public interest was better served by staying the TCA because the IESO can still run the Demand Response Auction in its previous form with only traditional load resources.

The OEB found that the AMPCO challenge could potentially succeed on its merits because of the disparate payment schemes between loads and generators are potentially unjustly discriminatory and may negatively affect competition as between loads and generators to be selected for the participation in the TCA.


The OEB must issue its final decision on the amendments no later than Jan. 26, 2020. In

making its decision on the amendments the OEB can consider whether the amendments are consistent with the purposes of the Electricity Act or unjustly discriminate in favour or against a market participant or class of market participants.

The implication of the OEB pushback on the IESO is significant. The IESO is currently

undertaking a Market Renewal Program to change the structure and operation of the

Ontario hybrid electricity market. This will be accomplished by amending the existing

market rules.


The AMPCO market rule challenge serves as a template for other sector participants in the future should they wish to challenge Market Renewal Program market rule amendments. 


Nation Rise wind farm revocation


On Dec. 4, Jeff Yurek, Ontario’s minister of the Environment, Conservation and Parks,

revoked the Renewable Energy Approval (REA) issued to the 100-megawatt Nation Rise

wind farm. This wind farm is more than half completed with a number of turbines already erected. Renewable energy developers need the REA to develop their projects and revocation of the REA effectively requires the developer to stop work on the project.


The Nation Rise wind farm has been regarded as a controversial project since its inception, by some members of the host community of North Stormont, who twice voted against it.  The director under the Environmental Protection Act issued a REA to Nation Rise in May 2018. A group of local residents, the Concerned Citizens of North Stormont, appealed the REA to the Environmental Review Tribunal (ERT). The ERT upheld the REA. The ERT was satisfied with the project’s commissioned studies that showed there were no material adverse effects, including no threats to the local bat population.


The Concerned Citizens of North Stormont appealed the ERT’s decision to the Environment Ministry. The Ministry has the authority to confirm, alter and revoke decisions of the ERT if the REA will cause serious harm to human health or to plant life, animal life or to the natural environment and if it is in the public interest to do so.


While Yurek largely agreed with the ERT, he did come to a different conclusion as to the

effect of the wind farm on the local bat population. Here, Yurek determined that there

would be serious and irreversible localized harm to the admittedly small bat population.

Having met the “harms test,” the minister then turned to the public interest analysis.


In the context of a REA, the Environmental Protection Act mandates the protection and 

conservation of the “environment,” where environment includes the “social, economic and cultural conditions that influence the life of humans or a community.” Accordingly Yurek considered the benefits of renewable energy against the harm to bats, the impact of the project on the local community and the need for electricity from the project. He ultimately concluded that the harm to the bats outweighed the value of the electricity from the Nation Rise Wind Farm and revoked the REA.


The revocation of the Nation Rise wind farm is an illustration of the extremely broad

jurisdiction that the Ministry potentially has to consider anything. In this case, Yurek

assessed the value of the energy output from this wind farm to the grid and concluded it

as minimal.  He states: “In terms of electricity need, while renewable energy is an important component of the province’s electricity grid, the project’s expected output of up to 100 megawatts, as noted on the approval, is obviously only a small fraction of Ontario’s energy usage.” In this decision, he determines that the province does not really need the output from Nation Rise.


The project’s owner, EDPR Canada, asserts that Yurek exercised his discretion in revoking

REA for the project without presenting evidence against EDPR’s expert studies that the

harm to the bat population will be minimal. We look forward to seeing if EDPR will appeal the minister’s decision.


The Environment Ministry’s decision to revoke the REA is surprising and only adds to the

uncertainty that generators are currently facing since the change in government in June

2018. This sends a strong message to infrastructure investors and lenders that Ontario is a risky place to do business. Any infrastructure developer looking to reduce policy-change risk might considering planning their projects to ensure that they can be developed, loans repaid and equity returns earned within the mandate of one government.


In part two of this series, we review National Steel Car Limited v. Independent Electricity

System Operator 2019 ONCA 929 which is a constitutional challenge to Ontario’s Global

Adjustment Mechanism. Parties with power purchase agreements with the IESO may wish to follow this case to ensure that the IESO has access to the funding it needs to meet its contractual obligations.



More energy and Environmental caseS to watch in 2020

 

By  Caroline Jageman and Michael Killeavy


This article originally appeared on The Lawyer's Daily website published by LexisNexis Canada Inc. on January 13, 2020. 


In part one of this two-part article, we discussed the Independent Electricity System

Operator (IESO) Market Rule challenge by the Association of Major Power Consumers in Ontario and the revocation of the Renewable Energy Approval for Nation Rise wind farm. In part two we discuss the recent Court of Appeal decision on the IESO’s Global Adjustment mechanism. This decision could have serious implications for how electricity costs get recovered in Ontario. The constitutional validity of the Global Adjustment charge was challenged in National Steel Car Limited v. Independent Electricity System Operator 2019 ONCA 929 at the Court of Appeal level.


By way of background, an electricity consumer’s bill consists of multiple charges. The two largest charges are (1) the hourly market price paid to generators to supply electricity as set by the provincial supply and demand, and (2) Global Adjustment which is the difference in cost between the hourly market price and the amount that the IESO is obligated to pay to electricity generators under contract. Each month in Ontario Global

Adjustment is around $1 billion.


Very roughly speaking, the IESO reports Global Adjustment payments as going approximately 45 per cent to nuclear generators, 40 per cent to renewable generation, 10 per cent to gas-fired generators and the balance to other forms of generations and conservation. The IESO’s breakdown is available here. 


National Steel Car (NSC) makes steel rail cars and is a heavy industrial consumer of electricity. In 2008, NSC’s electricity bill was approximately $208,000. By 2016, it had increased to approximately $3.4 million. NSC attributed this staggering increase to the introduction of the Green Energy and Green Economy Act and the introduction of the Feed-in Tariff program (FIT Program) in 2009. The FIT Program was a renewable energy generation program in which generators received a set price under a long-term 20-year contract to produce green energy. The difference between the market price of electricity and the contract price for electricity under the FIT Program is paid for through Global Adjustment.


In the spring of 2018, NSC brought a challenge to the constitutionality of Global

Adjustment. The FIT Program, it argued, is a social policy to subsidize rural and Aboriginal

communities, municipalities and co-operatives. The (now repealed) legislative

authorization of the FIT Program specifically encouraged the participation of Aboriginal and local communities. It also provided that these communities would be paid a higher price for the electricity generated.


Apparently, the province agreed that a stated policy goal of the FIT Program was to build

stronger economics in local and Aboriginal communities. Global Adjustment, which funds the FIT Program, NSC argued, is therefore not a regulatory charge which can be levied by the province but is instead a tax that can only be levied at the federal level.

From a constitutional validity standpoint, Ontario has the power of “Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.” (s. 92(2)).

Canada has the much broader power to raise “money by any mode or system of taxation.”


To distill the Court of Appeal’s analysis, only Canada can levy an indirect tax where the

proceeds are used for an unrelated policy goal.  Ontario can only levy a regulatory charge that is ancillary to a valid regulatory scheme (at paras. 27-28). In other words, if Global Adjustment is an indirect tax, it cannot be enacted by Ontario, and is therefore invalid. On the other hand, if Global Adjustment is a regulatory charge, it is valid.


The Court of Appeal acknowledges that it is often difficult to distinguish between a

regulatory charge and a tax. Quoting the Supreme Court, one must look at the levy’s

primary purpose. If its pith and substance is to raise revenues for a general purpose, it is

likely a tax. If it is more like a user fee to finance a regulatory scheme, then it is a

regulatory charge.


Initially, the motions judge reviewed NSC’s claim and dismissed it without a hearing on the basis that it was plain and obvious it had no chance of success. NSC appealed. The Court of Appeal overturned the motions judge’s decision finding that the constitutional invalidity of Global Adjustment was plausible. 


Without commenting on NSC’s chances of success at the full hearing on its merits, if Global Adjustment is found to be invalid under the Constitution Act, 1982 this would require a fundamental change to how electricity is paid for in Ontario over the next couple of decades.  The IESO needs Global Adjustment to fund its payment obligations under the various long-term power purchase agreements it signed with Ontario electricity generators. Global Adjustment between September 2018 to August 2019 was at approximately $12.5 billion: that money needs to come from somewhere. Without it, the IESO would be in default.


Parties who have generation contracts with the IESO may wish to follow this case to

ensure that the IESO has access to the funding required to meet its contractual

obligations.


That said, if Global Adjustment were found to be invalid, it is unlikely that the province

would allow the IESO to default on its contracts. Theoretically, the province could permit

the IESO to draw on provincial revenues to meet its obligations.


Each of the cases we have discussed in this two-part article has the potential to impact the structure of the Ontario electricity system. We will be following the above cases closely this year and report back on significant developments.


This is part two of a two-part article. Part one: Natural Resources, environment cases to

watch in 2020.


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