MSA
GaSe et a
ADMINISTRATOR
APPLICATION OF THE MARKET SURVEILLANCE
ADMINISTRATOR
File No. 0630
March 21, 2014PREFACE
‘The Market Surveillance Administrator is an independent enforcement agency that protects and promotes the fair,
efficient and openly competitive operation of Alberta's wholesale electricity markets and is retail electricity and
natural gas markets. The MSA also works to ensure that Market Participants comply with the Alberta Reliability
‘Standards and the Indepenclent System Operator's rules.TABLE OF CONTENTS
I. INTRODUCTION AND SUMMARY OF APPLICATION..... A
Il, THE MSA’S MANDATE AND KEY STEPS PRECEDING THE APPLICATION 11
Il, THE ALBERTA ELECTRIC ENERGY MARKE 7
‘A. Deregulation of Electricity Generation in Alberta, ale
B. The Setting of the Price for Electric Energy in Alberta 2
C. Forward Trading in Electric Energy in Alberta.. sn
D. Power Purchase Arrangements. 23
E. The Industry Practice Regarding Discretionary Outages... 2D
F, The Offer Behaviour Enforcement Guidelines.. 29
IV. TRANSALTA’S OPERATIONS AND CONDUCT vss ne 36
‘A. TransAlta’s Ownership of Coal-Fired Generating Units and Merchant Capacity during the
period from November 2010 to December 2011
B. The Organization of TransAlta
C. TransAlta’s Long Portfolio Pos
201 Deseo
D. The Portfe
Bidding Strategy of TransAlta...
E. The Implementation of the Portfolio Bidding Strategy November 19, 2010 .......-ss:ssee000 46
i. The November 19, 2010 Outage was a Discretionary Outage «0.0.0 AT
ii, TransAlta’s Implementation of the Portfolio Bidding Strategy for the November 19,
50
2010 Discretionary Outage.
iii, TransAlta's Calculation of the Benefits of the Portfolio Bidding Strategy for the
November 19, 2010 Discretionary Outage .. 52
F. The Implementation of the Portfolio Bidding Strategy: November 23, 2010 .. 57
i. The November 23, 2010 Derate was a Discretionary Outage... 57Vi.
vil
vii
Ix.
ii, TransAlta’s Implementation of the Portfolio Bidding Strategy for the November 23,
2010 Discretionary Outage. 159
iii, TransAlta’s Calculation of the Benefits of the Portfolio Bidding Strategy for the
November 23, 2010 Discretionary Outage .. 60
G. The Implementation of the Portfolio Bidding Strategy: December 13-16, 2010 -..rn 63
i The December 13-16, 2010 Outages were Discretionary Outages... 63
ii, —TransAlta’s Implementation of the Portfolio Bidding Strategy for the December 13-
16, 2010 Discretionary Outages... 65
ii, TransAlta’s Calculation of the Benefits of the Portfolio Bidding Strategy m.um.mu» 74
H. The Implementation of the Portfolio Bidding Strategy: February 16, 2011 80
80
i. The February 16, 2011 Outage was a Discretionary Outage.
ii, TransAlta’s Implementation of the Portfolio Bidding Strategy for the February 16,
2011 Discretionary Outage 82
iti, TransAlta’s Calculation of the Benefits of the Portfolio Bidding Strategy...
1. The MSA’s Conclusions Regarding the Implementation of the Portfolio Bidding Strategy
for the Outage Events.
IMPACT ON THE ALBERTA POOL PRICE FOR ELECTRICITY ....
|. IMPACT ON THE ALBERTA FORWARD PRICE FOR ELECTRICITY...
1. TRADING ON NON-PUBLIC OUTAGE RECORDS
A. Introduction.
B, Role of the Asset Optimizers...
C. Trading Chronology.
D. Summary 112
II, THE REMEDIES SOUGH'
rsntstenstctsteessnorecerneaess 119
CONCLUSION sevens: 1201
APPLICATION
OF THE MARKET SURVEILLANCE ADMINISTRATOR
INTRODUCTION AND SUMMARY OF APPLICATION
This Application is brought by the MSA pursuant to its statutory mandate. Defined terms
used in this Application are capitalized and set forth in Appendix 1 “Glossary of Term:
Section 6 of the EUA imposes an obligation on all Market Participants to conduct
themselves in a manner that supports the fair, efficient and openly competitive operation of
the market. As detailed in this Application, the MSA is satisfied that TransAlta has
undermined the integrity of the Alberta Wholesale Electric Energy Market by engaging in
anticompetitive conduct in 2010 and 2011
Atall relevant times TransAlta was a Market Participant,
In bringing this Application, the MSA is satisfied that TransAlta manipulated the price of
electric energy in Alberta by removing the Committed Capacity of its competitors at coal-
fired generating units subject to PPAs during tight supply periods. The purpose and effect
of this strategy was to move prices higher in the Power Pool and to create uncertainty that
would drive prices higher for forward contracts for electric energy.
The strategy worked by exploiting TransAlta’s position as an Owner under the PPAs.
‘These arrangements were put in place as part of efforts to mitigate the market power of
previously regulated entities and foster competition in the Alberta Wholesale Electric
Energy market. The strategy employed purposely timed PPA Outages for periods of tight
to TransA lta’s Portfolio Positions.
supply so that the Outages would be most bene!
The strategy was anticompetitive in that it relied upon removing significant amounts of its
competitors’ Committed Capacity from the available supply of electricity. As a result,
competitors were impeded from making offers to the Power Pool, enhancing TransAlta’s
market power, and prices for electric energy were materially increased. The MSA is
Page Isatisfied that other Market Participants and purchasers of electric energy in Alberta would
have been substantially harmed as a result.
Further, and as detailed in this Application, the MSA is satisfied that Messrs. Connelly and
Kaiser, were at all relevant times Market Participants, Messts. Connelly and Kaiser were
employed by TransAlta at the relevant times and Traded on non-public Outage Records in
breach of s. 6 of the BUA and the FEOC Regulation.
‘TransAlta is the Owner of certain coal-fired generating units that are subject to PPAs.
Under the PPAs, the Buyer has offer control over the vast majority of the output of
elect
ity from the unit, known as Com:
ted Capacity. In addition, TransAlta owns
Merchant Capacity under which it generates electricity for its own account. For Merchant
Capacity, TransAlta controls both the operation and the output (offer control) of electric
energy from the Merchant Capacity.
inally, TransAlta Trades in electric energy by
centering contracts in the forward market for the purchase and sale of electric energy.
Coal-fired generating units, from time to time, sustain mechanical events or damage that
require that the generating unit be shut down for repairs. Depending on the severity of the
ion to exercise discretion
event, the owner of the coal-fired generating unit may be in a posit
over both the necessity of taking an outage and when to take that outage. These types of
outages are known as Discretionary Outages. The practice in the Alberta electric energy
business is to take retionary Outages at Off Peak times, usually on weekends. The
PPAs contain provisions requiring monetary payments that incent the Owner to take
Discretionary Outages at times that maximize the number of Off Peak hours.
‘The MSA’s investigation has shown that, prior to the fall of 2010, TransAlta complied with
the Alberta practice relating to the timing of Discretionary Outages. However, in the fall of
2010, TransAlta’s practices change.
From late summer and early fall 2010 onwards, TransAlta entered into forward Trades of
elect
energy that created a market position whereby TransAlta would benefit financially
in the event of high Poo! Prices during the months of November 2010, December 2010 and
February 2011
Page 212. By memorandum dated October 21, 2010, TransAlta’s Asset Optimizers prepared for
senior officers at TransAlta a corporate strategy that was intended to (and did) increase
Pool Prices in Alberta, ‘The proposed corporate strategy entailed improperly timing
Discretionary Outages in order to maximize TransAlta’s profits in both the Power Pool and
the forward market, while impairing the fair, efficient and openly competitive operation of
the market.
13. The October 21, 2010 memorandum provides, in part, as follows:
‘The recent proposed change in policy by the MSA has opened the
door for portfolio bidding in the Alberta market for TransAlta.
This creates opportunity for TransAlta to use two key strategies to
capture higher revenues:
(1) Economic Withholding; and
2) Discretionary Outages
‘The aim of both the strategies is to move settled Poo! Price higher
by physically removing MW from the supply curve by offering
them in at a higher price or by removing from the system
altogether.
14, The October 21, 2010 memorandum further provides:
‘The effectiveness of t
strategy can be measured in two ways:
* Intrinsic value: This is the daily measureable gain in
revenues due to the offer strategy that can be calculated on
a Took back basis. The benefit is measured as the gross
margin of the position at settled Poo! Price versus the gross
‘margin of what would have happened had the offer strategy
not been deployed. This benefit will be realized in the
assets, the asset trading books and the proprietary books.
Extrinsic value: If in a given month prices are much
stronger than anticipated by the market, we would expect to
see a lift in various periods of the forward curve. This lift
can be attributed to the uncertainty caused by our bidding
behaviour. If we are then able to sell into this strength in
' Memorandum dated October 21, 2010 [Zab /]
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