Varcoe: Electricity watchdog finds Balancing Pool broke rules, causing massive losses

Following a lengthy investigation, Alberta’s electricity market watchdog has found a government agency — the Balancing Pool — broke the province’s own electricity rules in its handling of controversial power contracts.

But precisely why the Balancing Pool acted that way, or what role the NDP government played in its actions, remains a mystery.

After receiving complaints last year, the Market Surveillance Administrator (MSA) launched an investigation into the Balancing Pool’s conduct, and has concluded the independent agency breached its own regulations and the Electric Utilities Act.

The Balancing Pool did so by failing to manage its electricity generation assets in a commercial manner over the previous two years, as required by provincial legislation.

According to a settlement agreement, the Balancing Pool won’t have to pay any administrative penalties — it could have been fined up to $1 million a day — but agreed to manage its electricity generation in a commercial fashion in the future, and report publicly on its actions.

“Simply stated, the MSA is satisfied that the circumstances leading to the contravention it identified in this case were unique and will not re-occur,” according to the settlement document.

“Nonetheless, a public acknowledgment of the contraventions is in the public interest.”

If you’re trying to make sense of how a public agency like the Balancing Pool could break provincial rules, get caught by another provincial body, and not face stiffer consequences, get in line.

The bigger question is why it would do so in the first place?

“There’s been some real transgressions that have been going on here,” said Gary Reynolds, who headed the Balancing Pool between 2003 and 2011.

“The real question is what’s going to happen now? What are the repercussions of the fact that the Balancing Pool’s actions have resulted in millions of dollars of losses for Alberta taxpayers?

“Who is accountable here?”

Who, indeed?

Here’s what is known.

Last month, the power market watchdog and the Balancing Pool quietly filed settlement documents with the Alberta Utilities Commission. It wants the quasi-judicial regulatory agency to review and approve it after the MSA found the Balancing Pool violated rules.

The breach occurred after the NDP government’s ham-handed decision in 2015 to raise the carbon levy on large industrial operations, including coal-fired power plants.

The move jacked up operating cost for buyers of power purchase arrangements (PPAs), deals created during the deregulation of Alberta’s electricity market almost two decades ago.

These arrangements let generators sell power to other companies, who then resell it into the open market.

In 2015, the arrangements were already bleeding money due to slumping electricity prices; the carbon levy hike only made the losses worse.

However, the PPA owners — Enmax Corp. TransCanada Energy Ltd., Capital Power and ASTC Power Partnership — had an opt-out clause to hand these deals back to the Balancing Pool (which backstops the agreements) if a change in law made them more unprofitable.

The Balancing Pool, which is required to pass any losses or profits along to consumers through their monthly electrical bills, was stuck with contracts bleeding up to $70 million a month.

For the government agency, it was the equivalent of having someone drop a bag of feces on its doorstep, light it on fire and then ring the doorbell.

The obvious reaction should have been to stomp out the fire immediately and worry about scraping up the mess later.

Instead, it dithered.

It should have quickly reviewed and accepted the PPAs and taken immediate action to terminate them — paying out the plant owners the remaining net book value of the units — to stop the financial bleeding.

Such a move would have saved consumers hundreds of millions of dollars in additional PPA losses that occurred throughout 2017 and into this year, according to Reynolds.

While the indecision helped keep power prices lower for consumers, it set the stage for the problems identified by the MSA.

Under Alberta’s Electrical Utilities Act, the Balancing Pool (BP) is required to conduct itself in a manner “that supports the fair, efficient and openly competitive operation of the market.”

“In the MSA’s view … the BP should have acted to stem its losses by terminating the unprofitable PPAs as soon as possible,” states the settlement.

(The MSA also “has reservations” surrounding how the Balancing Pool offered electricity into the wholesale market and didn’t fully recover all its operating and long-term fixed costs. However, the two sides didn’t reach an agreement on whether this practice was in compliance.)

Balancing Pool chairman Robert Bhatia declined to comment on the matter this week.

A statement from the agency said it “took actions that it determined were prudent and consistent with its duties and responsibilities.

“However, the Balancing Pool acknowledges the concerns and issues raised by the MSA in its investigations and has agreed to enter into this settlement agreement.”

How very noble of a government agency to admit it broke the rules.

But why did it do so?

In part, it’s because the Notley government launched a lawsuit in mid-2016 against the PPA holders, which it ultimately settled last year.

At the time, the Balancing Pool said it wanted to wait for the province’s legal action to wrap up.

But it also had a window before the lawsuit was launched in the summer of 2016, or after several lawsuits were settled later that year, to have terminated the power agreements.

Yet, it waited until last summer to act. Two PPAs were finally terminated this spring; another will occur at the end of this month.

The Balancing Pool liquidated its $700 million investment fund to pay for its early losses, but also had to borrow $910 million (as of June) from the provincial government — money consumers will have to repay on their monthly power bills until 2030.

“Why would a government organization break its own rules — because their political masters told them to. That’s the only logical conclusion,” Alberta Party MLA Greg Clark said Thursday.

“This is not something that arm’s-length agencies will do without extreme political pressure.”

The Notley government reject this assertion.

“Any decisions regarding termination of PPAs have always been solely in the hands of the Balancing Pool, not the government,” Mike McKinnon, a spokesperson for Energy Minister Marg McCuaig-Boyd, said in a statement.

The Independent Power Producers Society of Alberta, representing about 100 of the province’s electricity suppliers, isn’t satisfied with the settlement.

The group filed a letter with the Alberta Utilities Commission on Sept. 11, citing several concerns with the proposed deal.

The agreement “does not adequately address the particular behaviour and misconduct of the BP that caused the harm and loss to (our) members, and that distorted the functioning of Alberta’s electricity market,” states a letter from its lawyers.

The organization filed analysis from consultancy EDC Associates that says if the Balancing Pool had bid its electricity into the market last year to fully recover all its variable and fixed costs to break even, power prices would have risen sharply. Generators would have “earned an additional $1.7 billion gross operating margin,” EDC concluded.

Officials with the MSA didn’t return calls this week, but in a letter said the settlement was the result of extensive negotiations with the Balancing Pool.

“In the MSA’s view, the settlement is fair, reasonable and its approval is in the public interest,” says a letter it sent to the AUC last month.

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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