You are on page 1of 125
MSA GaSe et a ADMINISTRATOR APPLICATION OF THE MARKET SURVEILLANCE ADMINISTRATOR File No. 0630 March 21, 2014 PREFACE ‘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... 57 Vi. 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: 120 1 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 I satisfied 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 2 12. 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 /] Page 3