Alberta – third party to statutory contract can initiate arbitration disputing fact triggering its obligations – #140

In TransAlta Generation Partnership v. Balancing Pool, 2018 ABQB 932, Mr. Justice Paul R. Jeffrey held that a creature of statute with duties under a statutory contract between two other parties had the right to initiate arbitration if neither of the main two parties to the contract chose to do so. The decision extended recognition further than earlier decisions in which the right to initiate arbitration appeared limited to joining an existing arbitration between the main contracting two parties.

TransAlta Generation Partnership (“TransAlta”), as owner and operator of an electricity power plant, and Enmax Energy Corporation (“Enmax”) as buyer, signed a contract for Enmax’ purchase of the electricity generated at TransAlta’s plant (the “Keephills Power Purchase Arrangement”).

Despite appearances, the parties’ Keephills Power Purchase Arrangement was not a private contract and involved another entity in some instances. Their contract, categorized as a power purchase agreement (“PPA”), and that other entity, called the “Balancing Pool” (“BP”), are both creatures of Alberta statute. The source of the PPA and BP reaches back to 1998 when Alberta sought to deregulate and increase the competitiveness of its electricity market.

At that time, Alberta introduced the Electric Utilities Act, SA 2003, c E-5.1 (“EUA”) and related regulations such as the Balancing Pool Regulation, Alta Reg 158/2003 (“BPR”) to set certain key terms and conditions regarding the generation, transmission, purchase and resale of electricity. The EUA introduced the PPA, a standard form long term contracts for the purchase and sale of electricity and created BP, a corporation.

A PPA may have the appearance and function of a private bilateral contract but is in fact a statutory enactment with pre-determined terms and conditions which tolerates limited variations. A PPA also provides for a mandatory arbitration process by which disputes are resolved. See para. 16 of Jeffrey J.’s reasons.

Unlike many other arbitration clauses which exclude the court’s involvement to either assistance in setting up the arbitration, issuing interim orders until the arbitration tribunal is constituted or to post-award challenges and enforcement, the detailed arbitration agreement includes a provision by which “either Party may refer a question of law to a court of competent jurisdiction for final and binding determination notwithstanding that it may be part of a dispute before the board of arbitrators.

BP may be a corporation created by the EUA but is neither part of the Alberta government nor an agent of the Crown. It is also not a full party to any specific PPA but does become involved when certain events disrupt the generation and purchase of electricity. Such an event occurs when a force majeure causes a producer to fall below its production target. This can occur when a generator fails and prevents an owner from delivering the agreed upon minimums to a buyer. Such events have significant financial consequences. SeeTransAlta Generation Partnership v Balancing Pool, 2014 ABCA 294 wherein the failure of a single generator triggered payments of millions of dollars.

[7] TransAlta’s plant suffered a generator failure. TransAlta alleges that the failure constitutes a force majeure. Enmax disputes that the event is a force majeure. If the event is a force majeure, the Balancing Pool will be responsible for a capacity payment of approximately $40,000,000. If the event is not a force majeure, Enmax will be responsible for the capacity payment, but TransAlta will be liable to Enmax for a penalty of approximately $167,000,000.

When an owner issues a force majeure notice under its PPA, the buyer is relieved of part of its obligation to pay for electricity which it is not receiving and BP steps in to pay the difference. By doing so, BP ensures that the owner does not bear the costs of the event. Rather, BP, and ultimately consumers, bears that cost. Jeffrey J. characterized BP’s role as acting as “a financial backstop”. As noted in TransAlta Generation Partnership v. Balancing Pool, 2012 ABQB 2 para. 36, BP is “a stranger to the PPA yet has a significant financial interest at stake on behalf of consumers”.

BP essentially bears the risks that owners and buyers might otherwise experience. One of its mandates is to manage the balancing pool accounts so that no profit or loss results. It passes risks onto consumers albeit in a manner sustained by the assets BP holds on behalf of consumers as well as rebates in certain circumstances.

BP’s and the PPA’s respective roles are summed up in earlier court decisions dealing with disputes involving BP and its role in PPAs. For example, see ATCO Electric Limited v. Alberta (Energy and Utilities Board), 2004 ABCA 215TransAlta Generation Partnership v. Balancing Pool, 2012 ABQB 2 and Balancing Pool v TransAlta Corporation, 2013 ABCA 409. Each comments on how the electricity market works now with BP and PPAs, including how disputes arise and are settled.

The fuller text of the PPA’s detailed Section 19.4 “Submission to Arbitration” is set out at para. 16 of Jeffrey J.’s reasons, the preamble of which introduces the format of the arbitration.

Subject to Section 19.3, all disputes with respect to this Arrangement shall, after the provisions of Section 19.2 have been followed, be forwarded to and resolved by binding arbitration in accordance with the Arbitration Act S.A. 1991, c.A-43.1 (the “Arbitration Act”), by a board of arbitrators in accordance with the following provisions ..

Following Section 19.4, Section 21.8 of the PPA, entitled “Rights of the Balancing Pool”, provides what appears to be limited involvement for BP:

21.8 In any instance where the Balancing Pool may be required to make a payment to either Party, the Party which may receive such payment shall promptly inform the Balancing Pool of the circumstances which may give rise to any such payment. With respect to any such payments and the surrounding circumstances as well as any matter requiring the agreement, confirmation or determination of the Balancing Pool, it shall, with respect to the settlement of disputes that arise between it and the Owner or the Buyer, have rights and obligations under Article 19 as if it were a party to this Arrangement.

TransAlta and BP presented Jeffrey J. with a novel issue.

Prior to his involvement, in the 2014 case, TransAlta Generation Partnership v Balancing Pool, 2014 ABCA 294, the Alberta Court of Appeal had held that BP was bound by the result of an arbitration between an owner and a buyer stemming from a force majeure dispute between them but could not initiate a second, separate arbitration.

In the case before him, Jeffrey J. was asked what initiative BP had, if any, when a buyer did not dispute an owner’s force majeure claim. Unlike the 2014 case before the Court of Appeal, BP’s attempt to initiate arbitration was the first and only arbitration initiated in regard to the force majeure claim.

In the case before Jeffrey J. BP had initiated its own arbitration. Jeffrey J. distinguished this from the earlier case law, noting that BP’s arbitration’s was “not a second, separate, or distinct proceeding duplicating proceedings between the Buyer and Owner.”

The application before Jeffrey J. arose in the context of a dispute between TransAlta and BP over the validity of a force majeure claim made by TransAlta.  BP paid TransAlta to compensate it for the capacity payments for which Enmax was relieved from paying as a consequence of the force majeure. After payment, BP challenged the force majeure declaration and sought to recover the payments made to TransAlta.  Enmax took no position regarding the force majeure claim.

BP disputed TransAlta’s force majeure and attempted to engage the dispute resolution procedure mandated by Section 19 of the PPA. TransAlta refused to participate, claiming that BP did not have standing to initiate arbitration.

BP persisted. It nominated an arbitrator for the purpose of arbitration pursuant to Section 19. TransAlta refused to appoint an arbitrator.

BP filed an originating application seeking to have the Court appoint a second arbitrator, and TransAlta responding by filing an application to strike BP’s application under Rule 3.68 of the Alberta Rules of Court, Alta Reg 124/2010.

After BP and TransAlta filed their respective applications, Alberta’s Minister of Energy amended the Balancing Pool Regulation, Alta Reg 158/2003 by adopting the Balancing Pool Amendment Regulation, Alta Reg 160/2017 (the “Amending Regulation”). The Amending Regulation clarified BP’s right to initiate arbitration to dispute a force majeure claim. The full text of the additional wording appears at para. 15 of Jeffrey J.’s reasons.

The parties disagreed on the legal effect of the Amending Regulation to this dispute. In particular, the parties disputed whether the Amending Regulation (a) confirmed the BP’s existing rights or (b) introduced new rights and, if it did introduce new rights, with or without retroactive effect.

First, Jeffrey J. declined to rely on the Amending Regulation as proof that the government sought to clarify or change the law, invoking section 37(1) of Alberta’s Interpretation Act, RSA 2000, c I-8.  Absent any intention, stated in the text itself or in the legislative process leading up to the adoption of the Amending Regulation, Jeffrey J. held that he had to determine the legal effect of the Regulation before the Amending Regulation. The express wording of the Interpretation Act stipulated that no implication must be drawn from an amendment.

Second, Jeffrey J. noted that the Alberta Court of Appeal’s decision in 2014 did not dispose of the issue before him. That earlier decision spoke only against authorizing BP to initiative its own, second arbitration once the owner and buyer had already engaged in earlier, existing arbitration. Doing so would be duplicative proceedings in regard to the same disputed force majeure claim. The Court of Appeal also held that, while BP could participate in that existing arbitration, it could not appoint a third arbitrator.

Third, Jeffrey J. determined that BP’s right to initiate arbitration was consistent with the legislative scheme. He held that the EUA created BP to handle the proceeds from the sale of PPAs, to hold them on behalf of consumers and to use those assets to relieve owners and buyers of the consequences of risk. BP absorbs the costs of the risk and does so on behalf of consumers. Though BP may be “a stranger to the PPA” it is also true that it “has a significant financial interest at stake on behalf of consumers”.

Jeffrey J. analysed the legislative history leading up to the adoption of the standard PPA and determined that Section 21.8 intended to give BP the independent ability to initiate arbitration to dispute a force majeure claim. Recognizing BP’s own right was a way to protect consumers from the impact of decisions taken by owners and buyers pursuing their own legitimate interests.

[51] The statutory bodies involved in the creation of the PPAs intended that BP would be able to dispute an invalid force majeure claim so that Owners could not game the PPA system and reap a windfall at the expense of electricity consumers.

In making that comment, Jeffrey J. did not do so in reference to any activity contained in the applications before him and did not reproach any conduct of the parties to the case presented to him. Rather, his statement stemmed only as the result of the intention he identified of those who had drafted the PPAs and inserted the arbitration procedure.

Fourth, Jeffrey J. noted that allowing BP to initiate arbitration by itself was consistent with the new market for electricity introduced in 1998.

[62] The protection of the Balancing Pool’s assets is a matter of importance to the public. That is why the EUA imposes a duty on the Balancing Pool to “manage risks prudently in all aspects of the Balancing Pool’s operations” and requires that the Balancing Pool act in “a manner that is responsible and efficient”: EUA, ss 85(1)(g), 86. The electricity markets scheme assigns the Balancing Pool the duty to guard its interests and the value of its assets which ultimately belong to consumers when the PPA scheme concludes: EUA, s 85(f). An interpretation which allows the Balancing Pool to effectively dispute what it views as an invalid claim of force majeure advances this purpose by ensuring consumers do not bear an unjustified cost. An interpretation which denies this right to the Balancing Pool by relying on the initiative of Buyers is inconsistent with the respective roles assigned to the Balancing Pool, Owners, and Buyers by the scheme of electricity market deregulation in Alberta.

Jeffrey J. concluded that, even though BP was not a party to the PPA, it did have the right to initiate arbitration under the PPA and it had that right before the Amending Regulation came into force.