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Alberta premier navigates rising electricity transmission costs, PPA dumping

Alberta Premier Rachel Notley has her hands full jugglingthe high cost of building out the province's electricity transmission systemswhile power buyers are dumping power purchase agreements, or PPAs, citing newgovernment policies.

Notley inherited both situations from the previousProgressive Conservative government, which had ruled the province for more thanfour decades prior to the New Democratic Party's election upset last May. Aspower prices in the province's deregulated electricity generation sectorslumped to record lows, consumers started to feel the shock of a C$3.45 billiontransmission spendingspree on their monthly bills.

Backlash over the transmission grid rebuild was expected,Notley said. The decision to retool the province's main north-south power linesaround a pair of high-voltage, direct-current systems operated by and , a Canadian affiliate ofbillionaire Warren Buffett's BerkshireHathaway Energy, was opposed by the socialist New Democratsthroughout the regulatory process. The issue of PPA dumping is more complex,she said.

"The government knew well before we got elected thatthey had embarked upon on a process of approving infrastructure build that wasgoing to significantly increase costs to consumers," Notley told reportersApril 1. "We knew that, that's when our caucus fought against that changewhen it was brought in back about 2011ish, and we knew that the transmissioncost issue which people have raised today was one that was coming down thepipe. On the issues of the PPAs, you will hear more from us on it in greater detailin the days to come because we're evaluating both our negotiating and legalposition."

TransCanadaCorp., AltaGas Ltd.,ENMAX Corp. andCapital Power Corp.have all notified the Balancing Pool — a provincial government entity set up toadminister the PPAs — that they intend to walk away from the agreements, citinga stipulation in the agreements that allows that if in government policy make themunprofitable. When the PPAs were being negotiated in the late 1990s, the clausewas inserted to placate buyers of the contracts that sold the output fromcoal-fired generators that had been developed with ratepayer funds. The auctionof the PPAs was part of the government's deregulation scheme.

Alberta's oil- and natural gas-dependent economy hasfaltered since 2014 and brought electricity demand and prices with it. Power productionhas since become unprofitable under many of the contracts. Companiessurrendering their PPAs cite Notley's Climate Leadership Plan, which upped theprovincial levy ongreenhouse gas emissions, as a negative change in legislation. Notley disagrees.

"Any folks out there, expert or otherwise, who suggestthat the PPA issue is somehow secondary to our Climate Leadership Plan clearlyare wrong — don't know what they're talking about — because our climate changeleadership plan has not actually come into effect," Notley said. "Regardlessof how wide or narrow one's interpretation is of the clauses that were injectedinto these agreements over a decade ago, you don't get to take action on thebase of something that hasn't happened yet. So I think that that needs to bemade very, very clear."

The Balancing Pool was set up to administer funds generatedfrom the PPA sales and unsold contracts. Alberta's government used some of thefunds collected from the sale of the PPAs in the early 2000s to subsidizeelectricity costs that soared after deregulation. It is within the BalancingPool's power to either sell electricity under the contracts or pay terminationfees to the plant operators. In either situation, losses from power sales ortermination fees will be charged to Alberta's electricity consumers.

The carbon levy on Alberta's large producers was introducedat C$15 per metric ton in 2009 and under Notley's climate legislation wasbumped to C$20/tonne. It is eventually scheduled to rise to C$30/tonne by 2018.Under the New Democrats, Alberta is scheduled to shutter the coal-fired plantsthat provide about half of its power output by 2030.

The government recently hired former PJMInterconnection LLC CEO Terry Boston to help ease the transition.Notley would not say if the government plans to reregulate the electricity generatorsector, but did say Boston's work will straddle the regulated and non-regulatedparts of the industry.

"Reregulation itself is a deeply complicated issue. We'repleased that we've already been able to bring in the expertise of someone asknowledgeable as our coal facilitator [Boston] who will be coming in soon,"Notley said. "We'll be able to work with him and with officials within theministry, officials at [the AlbertaElectric System Operator], officials at the Balancing Pool tofigure out the best process forward. But, at the end of the day, we stillbelieve the long-term objective of phasing out coal as part of our climatechange leadership plan must still be pursued in the best interests of Albertanson a variety of different levels, and we are very conscious of the need toensure that consumers are protected in that process."

A report submitted to the Alberta Utilities Commission, orAUC, by a coalition of consumer groups blasted provincial bodies for increasesin transmission rates. The report was part of an application before the AUC.

On March 31 the AUC issued an order granting the AESO, theprovince's grid operator, an increase of C$214 million, or about 12%, over its2015 updated forecast costs, effective April 1.

"The increase primarily resulted from a forecastincrease of [C]$161.4 million, or 10.6%, in wires costs reflecting recentapplications for transmission facility owner tariffs," the AUC said in theapplication details section of the order. "Ancillary service costs wereforecast to increase [C]$19.6 million, or 12.1%, while losses were forecast toincrease [C]$35.5 million, or 46.5%. Administrative costs were forecast todecrease [C]$2.6 million, or 2.6%."

The AESO said on its official Twitter feed that the responseto increasing transmission costs was overblown. It estimates costs on anaverage residential bill of C$21 per month will increase to a projected C$27per month by 2021.

"Over the next 20 years, we project transmission coststo continue to make up 20% of the average residential bill," the AESOtweeted.