Last month TransAlta kicked a damaging allegation into the court of public opinion: did it manipulate the electricity market by improperly shutting down six power plants during peak demand hours in order to jack up power prices and make millions in the process?
There are only two things the court of public opinion needs to know—what did TransAlta do and was this illegal? Judge for yourself.
Market manipulation or the trifecta?
TransAlta is a multibillion dollar company that owns power plants in Canada, the US and Australia. It generates power for itself and for its competitors. It sells its own electricity to the Alberta power pool (spot market) or under forward physical and financial contracts. It’s one of the big boys.
In 2010 TransAlta’s Asset Optimization Group (which runs the plants) was moved to the electricity trading floor and began reporting to the VP Trading.*
The Asset Optimizers developed a strategy to boost electricity prices by shutting down plants that produced electricity for TransAlta’s competitors and filling this supply gap with TransAlta’s own electricity which was sold into the market through its trading arm.
Senior management said make it so.
So the operations guy, Nathan Kaiser, passed along non-public outage information to the head trader, Scott Connelly, who used this information to buy and sell power in the market before the outage information was passed along to the rest of the players.
TransAlta shut down six plants at peak demand hours over 11 days between Dec 2010 and Feb 2011. The Feb 2011 shutdown triggered an energy emergency alert requiring all available generators to provide electricity to the grid in order to avert rolling blackouts.**
And TransAlta hit the trifecta: (1) it prevented its competitors from buying electricity it generated on their behalf by shutting in their PPA supply, (2) it created a power shortage that jacked up the pool price and the price of futures contracts and (3) it sold its own electricity into the pool and forward markets at substantially higher prices, making millions in the process–$6.69 million in profit after the Dec 2010 shutdowns and $8.5 million in three days after the Feb 2011 shutdown.**
TransAlta, Mr Kaiser and Mr Connelly deny that they’ve done anything wrong. In fact they say they complied with the MSA’s guidelines which allow power generators to “economically withhold” electricity from the market in order to boost electricity prices. Further they argue that the MSA is trying to change the rules of the game retrospectively and this is unfair.
Deregulating the electricity market
Alberta is one of only three jurisdictions on the planet that deregulated its electricity market (the other two are Texas and Australia). The government designed the unregulated market by applying its usual “consult with stakeholders” and “trust industry” strategy. Perhaps not a brilliant idea in hindsight.
Instead of creating legislation that set out a detailed “thou shalt not” list of anti-competitive behaviors, collusion and improper conduits from the operational folks to the marketing team, the government was satisfied with a simple statement in the governing legislation and regulations that said the legal standard through which all market activity will be judged is FEOC—the “fair, efficient and openly competitive operation of the market”.***
The MSA consulted with the stakeholders to set some parameters on the terms “economic withholding” and “fair”, “efficient” and “openly competitive” and in the end determined that the reasonable business person test would apply.
The MSA takes the position that no reasonable business person would consider TransAlta’s conduct to be accordance with FEOC. Certainly the complainant who was shut-in didn’t think it was kosher!
The MSA says that the FEOC principle qualifies the meaning of “economic withholding” so that while it’s permissible to raise or lower electricity prices by shutting plants for operational reasons it is not permissible to shut-in plants to benefit a company’s global trading portfolio.
The court of public opinion decides…
If the MSA complaint is upheld, TranAlta could face fines in the range of $66 million or higher ($1 million/day times 6 plants times 11 days). This will impact TransAlta’s earnings but more importantly blot TransAlta’s reputation.
The MSA indicates that Messrs Kaiser and Connelly could face similar fines, however this is unlikely, particularly given the MSA’s request that the AUC ban Mr Connelly and Mr Kaiser from trading in the physical and financial energy markets in Alberta for three years.
Regardless of what the AUC decides, its decision will be appealed, if for no other reason than it’s become a political football.
So how does the court of public opinion rule? Should we fine TransAlta $66 million and strip Messrs Kaiser and Connelly of the ability to trade for 3 years or should we blame the PC government who created a dysfunctional deregulated market that benefits the power generators at the expense of the consumers?
Far be it from Ms Soapbox to bias your thinking…but in my view the PC government’s experiment in deregulation is a colossal failure that enabled sophisticated generators like TransAlta to take advantage of “loopholes” that leave Albertans stuck with higher electricity costs. TransAlta and the government are equally at fault. TransAlta should be fined $33 million and the PC government should be removed from office as soon as possible.
*Market Surveillance Administrator, Notice of Request for Hearing, Feb 2014
**Calgary Herald, Mar 1, 2014, A4
***Electric Utilities Act, s 6; Alta Reg 159/2009