TransAlta and the Court of Public Opinion: A $66 million fine or multimillions in profits?

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’s argument

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.

Sundance Coal Fired Plant

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

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21 Responses to TransAlta and the Court of Public Opinion: A $66 million fine or multimillions in profits?

  1. David says:

    Terrific Susan Again an Op Ed is needed so citizens can understand ! D

    Sent from my iPhone

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  2. Thanks David, I’ll give it a shot!

  3. Carol Wodak says:

    Actually, TransAlta and any other entity involved should be fined the amount of profits they expected to earn; and the folks who proposed and approved the scheme should be fined the amount they might have earned as a result of proposing or implementing the scheme and should lose their jobs. If we really mean that this is unacceptable behaviour, then let’s act accordingly. Should I also say something about the Nuremberg defense [as in, what’s wrong is wrong, even if you’re only following orders]?

    • Carol, I agree. Last week ALL of the opposition parties pummelled the government, demanding to know whether it’s government policy to allow companies like TransAlta to manipulate the electricity market by withholding electricity. The Associate Minister for Electricity, Donna Kennedy-Glans, and the Energy Minister, Diana McQueen, bobbed and weaved, saying that the government did not condone anti-competitive behavior but since the matter was before the Alberta Utilities Commission, they could say no more.
      If the AUC doesn’t nail TransAlta for this, then the only way for the government to prove that it does not condone anti-competitive behavior is re-write the legislation…think they’ll do it?

      • canadiankgb says:

        Transalta’s behaviour is unethical. Ever since Marshall Williams stepped down as CEO the company ethics have changed. Instead of doing business in a manner that was right for both Albertans AND shareholders, they are 100% focused on profit. What makes it completely unacceptable is that electricity is a necessity, and the current valuation makes it extraordinarily challenging on the average citizen. It is akin to withholding food and creating a false famine in order to raise costs at the grocery store.

        I agree with Carol. Fine them the amount the earned and fire both Kaiser and Connelly.

        As to electing another party, soon…….

      • KGB, our electricity bill shot up 25% this month and there’s nothing we can do about it because the volatility created by the power generators in the futures contracts that they signed months ago doesn’t show up on my electricity bill until this month’s bill. A friend who is very experienced in designing deregulated markets foresaw this increase in volatility two years ago and said it’s going to get a lot worse. So all eyes on on the AUC…will they come through or will they allow corporations to make money hand over fist on the backs of Albertans?

  4. Some terrible episodes occurred in the power manipulation deals for consumers and knowing some of the folks impacted I checked in with Mr. Mcdonald (the then energy critic-mla for goldbar) and what I learned floored me as he had done extensive investigations into all the aspects and had literature for me to peruse. He was getting nowhere in the legislative sittings as the pc mla’s just completely ignored his questioning by heckling and all the other means they used to ignore him which I am sure everyone is aware of. The frustration he encountered as energy critic probably was the reason he exited from the political scene. To make a short explanation possible I will skip the gruesome details and that winter we spend in Texas and I was in a conversation with a very informed retired political individual who knew about Canada from his working on the alcan highway in his younger years and when I informed him that our premier when being queried about the plans to deregulate and he had answered with and I quote “well I dont really understand this deregulation business except for the fact it brings cheaper power to the consumers” and my texan friend was then asking some pertinent questions like (how many power companys do you have there in Alberta) and when I told him three or four he explained to me it was feasible in Texas because they had 37 and that was why the competiveness kicked in. That innocent conversation was enough for me, I knew we had been had big time.
    I am getting fairly long in the tooth and certainly hope this power horror story is rectified before my demise.
    Thanx—Tom

    • You nailed it Tom. Interestingly even Texas with 37 generators is pulling back from full bore deregulation…it’s just not working properly. Here in Alberta the power generation companies convinced the government (through the MSA) to allow the price for electricity to float between 0 cents to $1000 per megawatt hour. Once they got that they argued it wasn’t enough and the maximum price should be raised to $10,000 per megawatt hour in order to provide enough “elasticity” in the marketplace. Thankfully someone decided that this was ridiculous and stuck with the $1000 maximum. And wouldn’t you know it, in Dec 2010 when TransAlta shut down three plants the price spiked to $992.25. How high would it have gone if the maximum was $10,000?

  5. The email trail shows at least a lamentable lack of ethics and I think they’re absolutely liable to the penalties the regulator wants to impose.

    • Phil, I’m surprised by TransAlta’s aggressive stance on this. They’re arguing that the MSA condoned their actions because of some comments it made in two guidance documents. TransAlta is ignoring the clear language in the legislation and regulation that requires conduct that supports “fair, efficient and open competition” and lists an number of examples including price manipulation.

      The NEB penalizes pipeline companies with operations groups and marketing groups for similar conduct on the strength of section 67 which prohibits unjust discrimination in just 18 words: “ A company shall not make any unjust discrimination in tolls, service or facilities against any person or locality.” (By the way section 68 puts the burden of proof squarely on the shoulders of the company to prove otherwise). I’d argue that the AUC should apply the FEOC principle in the same way.

  6. Jim Lees says:

    This sounds familiar…..didn’t Enron pull the same thing to California, and in the process bankrupt them? As I recall it cost the Governor of California his position, and in the end, Enron went out of business.

    Sent from my iPad

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    • Jim, Enron is an excellent comparison. Apparently Enron’s CEO was so comfortable that Enron could outmaneuver California state regulators that he told the Chairman of the California Power Authority, “In the final analysis, it doesn’t matter what you crazy people in California do, because I got smart guys who can always figure out how to make money.”

      Makes me wonder what the TransAlta people were telling themselves in the 850 documents they refused to produce on the grounds they were privileged. Madam Justice Erb of the Court of Queen’s Bench disagreed and ordered TransAlta to release a “significant portion” of these documents. What’s weird is the QB decision says some of these so-called privileged documents were nothing more than blank pages and pages with corporate logos on them. TransAlta is appealing the QB decision so we won’t know what is in these documents for a little while. Could be very interesting.

  7. Carlos Beca says:

    It is interesting that the great proponents of the capitalist system are always so vocal about the virtues of competition. In its extreme form they want the market to be our new Creator and the single decision maker in our lives. When I look around and especially to the most important industries and services all I can find is manipulation, collusion, price fixing …. and on and on. On the weekend I listened to the Sunday Edition with Michael Enright on the CBC and he interviewed Dennis Howlett, the executive director of Canadians for Tax Fairness on Corporate Tax Avoidance. The pattern is the same, people abuse the system, enforcement and regulation are weakened and those of us who follow the rules become trapped in this vicious Neo-Conservative world of the law of the jungle.
    It seems to me that this is no longer a defficiency with the system. This sounds to me to be a purposedly created structure that is going to challenge the Russian Mafia.
    Transalta crossed the line, but not even a judge has the power to do anything about it? What kind of system is this? What do you call a system when corporations and mafias can easily bend the rules? What kind of rule of law is this?

    • Carlos, I think the TransAlta case is the perfect test of the PC government. Will the AUC have the courage to impose heavy duty penalties on TransAlta and the two employees, or will it allow TransAlta to wiggle off the hook? The only way TransAlta can get off is if it persuades the AUC that FEOC, particularly the prohibition against market manipulation, is not as clear as it should be. I’d be amazed if they get away with this but who knows, this is Alberta.
      Your comment about the impact of weak legislation is well taken. A friend described this situation as the confluence of two key PC principles: an abiding belief in the free market and light handed regulation…somehow it’s always the little guy who pays.

  8. Ted Woynillowicz says:

    Forgot about Hugh Mac Donald, he’s a walikng encyclopaedia on this matter. He brought the government to apopletic heights with his questioning but was ignored by media. Otherwise there would have been a major scandal.

  9. Roy Wright says:

    I am not shocked over this situation (pun intended) but can see the irrational logic that may have been the driving force. Firstly, companies always make sure they take care of themselves…that is the spirit of entrepreneurial capitalism and I suspect most of us can agree on that. Then government regulates, especially in a monopolistic or oligopolistic market which our electrical market appears to fit into. Then the greater public good (us Albertans) will be taken care of. However, government forgot or was misled into what it thought its role was. It appears to me that government, naive as usual, thought the market place would sort things out (just wait until it applies the same logic to taking care of seniors, or processing of our lab work). However, it forgot that its basic role is to curb the excesses of capitalism (thank Adam Smith for that pithy bit of advice). Instead, it got into the tank with a bunch of sharks, fell hook, line and sinker for the “Trust us, we’re from industry and know how to make this work” and the public interest got turned into guppy food for the sharks who benefitted on insider information, collusion and market manipulation. Shades of Enron with government support.

    The verdict:
    1. Hang the government for abdicating its responsibility to the private market and for neglecting to take care of its citizens who they are supposed to represent
    2. Hang TA for trying to blame government and not exercising some fundamental moral judgement that transcends making a profit at any cost

    • Roy, the Edmonton Journal carried a letter to the editor today from someone who attended an Alberta Association of Municipal Districts and Counties conference about deregulation with Ralph Klein and Steve West. Klein asked for a show of hands in support of deregulation. Very few shot up. The majority of the participants urged Klein to reconsider “…upon which the premier became upset and turned to his energy minister, Steve West, and said, “This man says it will work, and we are going ahead”.

      A friend referred to this exchange and said “No one could influence the decision because in their minds they thought, I mean believed it would work”. The distinction between “thought” and “believed” is critical. A little more thinking and a little less blind faith in industry would be very welcome right about now.

      PS. I think we’ve done away with capital punishment in this country! 🙂

  10. Humdrum says:

    They should go back to the old system where the electricity was on a guaranteed rate of return, the problem being there are all these PPP overpriced electric utilities which need a inordinately high rate so they won’t go broke. Are they not supplying power to the grid, but at enormous cost? But, maybe these could also get a specified rate of return, even though they supply electricity at screwball, uneconomic high rates.
    This is unfair to those utilities, like TA, which supply electricity at a comparatively low rate.
    Everybody should get for example, an 8% rate of return, even though it might have cost the wind power guy 1.5 million to put up that windmill, and it only supplies electricity to 250 homes… when the wind is blowing,

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