Elections, Electricity Contracts and the Limits of Government Power
In an unwelcome trend, electricity contracts seem to receive undue attention during Ontario provincial election campaigns. Most recently, on May 7th Ontario NDP leader, Andrea Horwath, made the vague assertion that an NDP government would “examine hydro contracts” as a means of finding savings for ratepayers. Readers of this blog will be aware that the contracts she proposes to examine are those between the Ontario Power Authority (“OPA”) and independent power producers.
It is not clear what Ms. Horvath means to “examine”. As of December 31, 2013, the OPA had contracts for 22,448 MW of electricity supply generation, over two-thirds of which are in commercial operation. Of these contracts, 1,686 are renewable energy contracts signed under the Feed-in-Tariff (“FIT”) program and represent 4,492 MW of capacity. We assume that these require no “examination” as their terms, conditions and prices are on the public record. Of the remaining OPA contracts, the various gas generation procurements (8,786 MW), non-FIT hydro-electric procurement (1,140 MW) and the Bruce Power nuclear refurbishment (3,000 MW) comprise the bulk of the OPA’s contracted capacity. While most of the terms of these contracts are public, certain commercial details are known only to the parties thereto. Is Ms. Horvath suggesting that these are the contracts that she will examine? And what will happen following such examination? Implicit in her remarks is that the NDP may attempt to renegotiate them in order to lower amounts paid by the OPA. But why would a power producer wish to renegotiate a contract to reduce its revenues absent some form of coercion? It would be ironic if the NDP were to enter this election campaign railing about gas contract cancellations by the Provincial Liberals but seeking a mandate to renegotiate the OPA’s gas contracts when the only bargaining leverage may be the threat of contract cancellation.
The ambiguity of Ms. Horvath’s comments can be contrasted with more concrete threats to Ontario power sector’s investors’ confidence. Few will forget the surprise announcement made during the 2011 Provincial election by Mississauga South MPP, Charles Sousa, cancelling the 280 MW gas plant being developed in Mississauga by Greenfield Power. This announcement came less than a year after the Liberals announced the cancellation of TransCanada’s $1.2 billion (estimated) 900 MW gas plant in Oakville. Both plants had OPA contracts and, according to Ontario’s Auditor General, cost the Province $1.1 billion dollars to cancel.
Renewable energy proponents will also be aware of Progressive Conservative leader Tim Hudak’s constantly stated dislike of OPA contracts. Mr. Hudak ran in the last election promising to cancel the FIT program and for a while expressing a desire to cancel what he called the “$7 billion sweetheart Samsung deal”. Given the Auditor General’s findings on the gas plants, Ontario tax payers can probably breathe a sigh of relief that Mr. Hudak was never given the opportunity to cancel a contract that called for capital investment of several orders of magnitude more than the Oakville and Mississauga gas plants.
Based on the above, we think it prudent to remind all three political parties of some basic tenets of contract and sovereign risk.
First, the OPA’s contracts generally do not permit the OPA to terminate them without cause. Independent power producers must meet their obligations under these contracts or risk termination for non-performance, for example, by not having their projects operational by certain milestone dates. However, other than the ability of the OPA to terminate renewable projects prior to “notice to proceed” under section 2.4(a)(i) of the contracts issued under FIT 2.0[i], we are not aware of any other ability of the OPA to terminate contracts at their discretion. Second, the OPA is a corporation with the rights and obligations of a natural person. Its contractual obligations are binding on it. As a result, it can be sued for breach of contract, and if it is found to have breached its duties it can also be found liable for damages. Accordingly, while campaign promises are nice, all party leaders should recognize that if they form a government and somehow compel the OPA to terminate any of its existing contracts without cause there will probably be financial consequences.
Unfortunately, this does not mean that independent power producers do not have to worry about campaign trail musings or express threats regarding their contractual rights. While the law regarding contracts that are entered into by governments or by their agencies is the same as the law that applies to contracts generally, government ultimately has powers that private entities do not: it can pass laws that limit private parties’ rights. In particular, a law could be passed that prevents a party from suing or recovering damages from the provincial Crown or, in this industry, the OPA. This is “sovereign risk” in a nutshell.
Fortunately, the inherent political and economic risks of such actions make them relatively rare because governments worry that interference in the contractual rights of private parties would have a chilling effect on investment. However, precedents do exist in this Province and in this industry. Another mitigant is, as we have just seen with the recent provincial budget, government’s ability to proceed with legislation may be restricted, especially if the governing party only holds a minority of seats in the legislature.
Government ultimately has the power to follow through with campaign promises that implicitly or expressly contemplate interference with private contractual rights. However, to do so without the threat of direct financial consequence would require legislation, and we should all be wary of the indirect consequences that could arise from the passage of any such legislation.
[i]As a reaction to industry concerns about the Progressive Conservatives’ stated intention to cancel FIT contracts, a waiver of the OPA’s termination rights for FIT 1.0 contracts was announced in July 2011. We expect that most holders of FIT 1.0 contracts took advantage of this waiver. For a recap, see our article found here: http://www.mccarthy.ca/article_detail.aspx?id=5491.
election Electricity feed-in-tariff FIT Program Gas Plant Cancellations Ontario Power Authority OPA Power Purchase Agreements renewable energy Renewable Power