Marcy Cochlan
Managing Director, Market Regulation & Policy
Direct Line:
Email:
403-267-4664
[email protected]
April 7, 2017
Market Surveillance Administrator
Suite 500, 400 - 5th Avenue SW
Calgary, AB
T2P 0L6
Attention: Matt Ayres, Market Surveillance Administrator
Dear Dr. Ayres:
RE: Consultation re Revocation of Offer Behaviour Enforcement Guidelines
TransAlta Corporation (“TransAlta”) submits the following responses to points outlined in the
Market Surveillance Administrator’s (MSA) notice to participants and stakeholders on the possible
revocation of the Offer Behaviour Enforcement Guidelines (OBEG) issued on March 17, 2017.
At the outset, TransAlta expresses its concern regarding the MSA’s process for reviewing the
OBEG. Any action as significant as revoking OBEG must be undertaken with a full stakeholder
consultation process. A sudden announcement and limited consultation is unacceptable. The
MSA has a duty to carry out its mandate in a fair and responsible manner.1 This includes the
provision of due process to affected market participants, particularly where fundamental principles
of market behavior and effective market design are at play.
A review of OBEG should be undertaken as part of the consultation on the capacity market design.
Market participants must be provided a reasonable opportunity to be informed of the reasons for
any proposed change, ask questions of the MSA, provide input, and exchange views on the
proposed change at a stakeholder meeting and thereafter. Market participants should also be
provided the opportunity to submit written comments after the stakeholder meeting to state their
positions, express their concerns or support for the proposal, and make suggestions that may
address any identified concerns.
TransAlta strongly disagrees with a revocation or need to amend OBEG prior to the
implementation of the capacity market structure for the following reasons.
First, the MSA’s concerns about an exercise of market power and a loss of static efficiency are
not substantiated in fact. To the contrary, the MSA itself has previously commented that static
1
“The Market Surveillance Administrator shall carry out its mandate in a fair and responsible manner.” Section 40, Division 2,
Alberta Utilities Commission Act.
efficiency losses are insignificant.2 Furthermore, the only significant change to the concentration
of market power that may raise concern about its exercise has been the transfer of market share
offer control from PPA buyers to the Balancing Pool. The practical implications of this are that
market participants have less market share offer control than they have ever held historically and
the most significant concentration of market power resides with the Balancing Pool --an entity that
does not economically withhold and strictly adheres to a strategy of offering its units at their short
run marginal costs. The fact is current market prices are at historical lows and do not raise any
concerns about economic withholding.
Second, market participants are ‘free to pursue individually profit maximizing behavior that does
not impact on competitors’ conduct’3 under the framework of an energy only market. Market
participants invested in the development of new assets and continue to invest capital into existing
assets with the expectation of a reasonable opportunity to earn a return of and on historical
investments made and sustaining capital expenditures. With respect to existing assets, these
investments include reducing the greenhouse gas emissions to meet Climate Leadership Plan
objectives and operational investments without which the reliability of the interconnected
electricity system would suffer. Generators cannot be expected to operate at a loss. As the MSA
previously acknowledged, it is inappropriate to expect market participants to price at marginal
cost:
“ in a high fixed cost industry such as electricity generation, where revenue is obtained
only from sales into the wholesale market (Alberta’s energy-only market) it is not
appropriate that firms be expected (or required) to price at their marginal cost because
they will not be able to cover their fixed costs, make a normal return and afford to reinvest
in the market (or attract other investors to the market because of the stable revenue
platform).”4
Furthermore, the wholesale electricity market must continue to provide appropriate price signals
to drive competitive responses such as import participation, demand response, and rival
generator actions such as choosing not to mothball or retire units and/or investing or innovating
to reduce costs and increase operational flexibility. Dr. Olmstead of the MSA rightly
acknowledged that:
Economic withholding is consistent with a competitive electricity market to the extent that
attempts by a generator to economically withhold are generally restrained by competitive
forces. These forces are (i) the degree to which consumers are willing to reduce total
consumption (or switch to a substitute product) as a result of an increase in the pool price
2
Page 4,the MSA stated: :total static efficiency losses were less than 1 percent of the average wholesale market price over the
period measured, 2006-2011. The MSA regards this magnitude as insignificant, and easily outweighed by dynamic efficiency
gains.” State of the Market Report 2012: An Assessment of Structure, Conduct, and Performance of Alberta’s wholesale electricity
market, MSA, December 10, 2012. http://albertamsa.ca/uploads/pdf/Archive/2012/SOTM%20Final%20Report%2020130104.pdf
3
Page 9, Offer Behaviour Enforcement Guideline for Alberta’s Wholesale Electricity Market, MSA, January 14, 2011.
4
Page 4, State of the Market Report 2012: An Assessment of Structure, Conduct, and Performance of Alberta’s wholesale electricity
market, MSA, December 10, 2012. http://albertamsa.ca/uploads/pdf/Archive/2012/SOTM%20Final%20Report%2020130104.pdf
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and (ii) the reaction of rival generators to increase their output in response to an increase
in the pool price.5
Third, OBEG remains relevant. The OBEG in its current form provides important guidance on
section 6 of the Electric Utilities Act and the Fair, Efficient and Open Competition Regulation under
the energy only market structure. OBEG describes the concepts of efficiency, unilateral and
coordinated effects, conduct that does not support fair, efficient and open competition, preferential
sharing of records, market share offer control, the MSA process, and non-enforcement remedies.
The OBEG provides important clarification to all market participants that the MSA will not seek to
pursue enforcement action on acceptable offer behavior that is consistent with unilateral profit
maximizing behavior in the current market structure. A change in the MSA’s enforcement stance
is inconsistent with the market design and raises concerns that market participants may be
unfairly scrutinized and investigated for engaging in completely rational competitive conduct.
Fourth, as noted above, Alberta’s energy-only market structure is currently absent a capacity
market or other mechanisms to support generation investments. An announcement that Alberta
will transition to a capacity market structure does not fundamentally alter the current basis for
making investments. The MSA’s statement that “the exercise of market power, including
“economic withholding” may no longer be consistent with achieving efficiency set out in the
legislative framework” is presumptuous and incorrect. Charles Rivers Associates, the AESO’s
external consultant for the development of the capacity market design, acknowledges that the
unilateral exercise of market power could continue as part of the new market structure:
The Alberta capacity market would provide resource adequacy by providing the means for
capacity resources to earn the missing money necessary to support any investment in
generation necessary for system adequacy. This overlaps with the historical expectation
that generators would use their pricing power in the energy-only market to secure returns
that would support such investment. There may be a case to argue that this right to
exercise energy market power is no longer necessary or appropriate. On the other hand,
there is a case that scarcity pricing in the energy market remains an essential signal to all
market participants as it incentivizes efficient demand response and investment by
generators in key operational characteristics such as quick start or fast ramping
characteristics. Arguably, the unilateral exercise of market power in the energy market
could continue as the source of such a price signal.6
Finally, revoking OBEG without replacing that guidance with clarification about what is acceptable
offer behavior creates an unacceptable, non-transparent enforcement scheme. The MSA must
be transparent with the market on its views on topics including, but not limited to, the inclusion of
unit commitment costs, fixed costs and reasonable returns in offers; mothballing decisions;
investor uncertainty and dynamic efficiency losses; allocative inefficiencies created by selling at
prices that are insufficient to cover the cost of production; and acceptable optimization of offers
based on portfolio of assets. Revocation of OBEG has the potential to significantly impact the
5
Paragraph 16, Page 2, Assessment of the impact of the Historical Trading Report on competition in the Alberta electricity market,
MSA, November 30, 2015.
https://www2.auc.ab.ca/Proceeding21115/ProceedingDocuments/HTRApplicationwithAppendices_0012.pdf
6
Page 59, A Case Study in Capacity Market Design and Considerations for Alberta, Charles River Associates, March 30, 2017.
https://www.aeso.ca/assets/Uploads/CRA-AESO-Capacity-Market-Design-Report-03302017-P1.pdf
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forward and spot markets, increase the risks faced by all participants, chill market participation
and investment, and reduce market liquidity.
In summary, TransAlta disagrees that this is the time to contemplate a revocation or amendment
of OBEG. The future transition to the capacity market is not a compelling reason to take action
now; if this is the MSA’s sole motivation for its notice then it is more appropriate to undertake this
consultation as part of the capacity market design consultation and take action when the capacity
market design becomes clearer. It is also speculated that the MSA may be considering this action
in contemplation of a change in control related to the PPAs held by the Balancing Pool.
Stakeholders will have different concerns, issues, and positions on OBEG matters related to
returning PPAs to owners. These views cannot be adequately dealt with in a general consultation
on revoking or amending OBEG and must be handled in a separate and distinct consultation.
Please contact Marcy Cochlan directly at 403-267-4644 or
[email protected] if you have any questions related to this letter.
by
email
at
Yours truly,
TRANSALTA CORPORATION
Marcy Cochlan
Managing Director, Market Regulation and Policy
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