Oh, So That’s What Sovereign Risk Means! Ontario Passes Legislation to Terminate the White Pines Wind Project
Yesterday, July 25, 2018, the Urgent Priorities Act, 2018, introduced to the Ontario legislative assembly by Minister of Energy, Northern Development and Mines Greg Rickford, received Royal assent. A copy of the new statute can be located here.
Schedule 2 to this new statute sets out the White Pines Wind Project Termination Act (the “Act”), which specifically targets wpd White Pines Wind Incorporated (“White Pines”) and the White Pines Wind Project (the “Project”) that White Pines was developing. The Project was an 18.45 MW on-shore wind project that received, pursuant to a “version 1” Feed-in Tariff Contract dated May 4, 2010 (the “FIT Contract”), its notice to proceed (“NTP”) from the Independent Electricity System Operator (the “IESO”) on May 11, 2018.
Of cold comfort to White Pines but much to the relief of other industry participants, the Act does not contain a broader power to generally cancel renewable energy contracts that have achieved NTP or key development milestones (“KDM”). As noted in a previous blog, other than the Project’s FIT Contract, all other contracts subject to termination thus far have become victims of their respective pre-NTP/KDM early termination provisions. By their terms, such contracts were always at significant risk of termination in the case of policy shifts by the IESO or the provincial government.
With the issuance of its NTP, White Pines may have had contractual assurances that the Project may proceed, however, in its few provisions, the Act appears intent to ensure that the Project is well and truly dead. The Act mandates the termination of the contracts to which the IESO is party with White Pines, namely the FIT Contract and – perhaps to the surprise of the Project’s lender - the “Secured Lender Consent and Acknowledgement Agreement”. In case there are any other contracts that may be of value to the Project the Act gives the power to Cabinet to retroactively terminate by regulation any other contracts to which White Pines is party. Furthermore, in the unlikely scenario that White Pines might have decided to develop the Project on a merchant basis, the Act salts the earth by revoking the permits, including the critical Renewable Energy Approval, issued to White Pines. If White Pines thought it was done with the Project, however, the Act further requires White Pines to decommission the Project and to be liable to the Crown for any failure to do so. Lastly, in case White Pines becomes obstreperous, the Act prevents it from making any claims, bringing any proceedings, or enforcing any judgment against the Crown, the IESO and certain related persons in connection with the termination or any provision of the Act.
Despite its seemingly ironclad defences to claims, the Act is not without recompense to White Pines and its stakeholders as it does provide an entitlement to compensation from the Crown. The compensation will be calculated in accordance with the formula in Section 6(2) of the Act. Such formula includes payment for: (i) the expenses reasonably incurred by White Pines in relation to, among other things, the development of the Project, employee termination, subcontractor or landlord losses, and decommissioning; (ii) the Project lender’s debt amount and debt make-whole amount; and (iii) “any additional amount or thing that might be prescribed” by regulation. The total amount of compensation payable is subject to monetary limits that may be prescribed by regulation, per Subsection 6(4) of the Act.
Observant readers may recognize the foregoing formulation as a legislative distillation of the post-NTP/KDM compensation provisions of the FIT version 3, 4 and 5 contracts and the LRP I contracts. Indeed, our conclusion is that the Crown has unilaterally amended the Project’s version 1 FIT Contract to incorporate those termination for convenience provisions. The key difference is that those provisions provided some modicum of return on equity capital. In the case of the Act, this appears to be a dangling carrot, as Subsection 6(8) provides that White Pine will not be compensated for any loss of goodwill or profits, unless provided for by regulations for purposes of clause (iii) reproduced above. We note as well that no compensation will be paid unless White Pines submits a full accounting within one year of the Act coming into force, which suggests that the Crown is giving White Pines a year to decommission and otherwise fall in line. Another interesting difference from a policy perspective is that because the Crown and not the IESO is paying compensation, it will ultimately be taxpayers and not ratepayers who are on the hook. There is no indication in the Act as to whether the compensation arising from the pre-NTP/KDM terminations mentioned above will be paid by anyone other than the IESO and, therefore, eventually passed on to ratepayers.
So what can we take from the Act? From a pedagogical perspective it is a stark example but practical illustration of “sovereign risk” that we have commented about in the past. Having previously said things like “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 [IESO]”…, the Act demonstrates unequivocally what such a law would look like. It will certainly act as a fresh reminder that in every government procurement there is counterparty risk. What will take longer to determine is the consequences, if any, that such legislation will have on Ontario’s investment climate. In addition to unilaterally depriving White Pines of its contractual, administrative and equitable rights, Subsection 5(6) of the Act also warns all other stakeholders or interested parties that no person may obtain any compensation, remedy or relief for the termination of instruments or rights under the Act. We expect that the Act will not quickly fade from memory of current investors and will quickly be brought to the attention of future investors in infrastructure in Ontario.