Capital Power Corporation
1200 – 10423 101 Street NW
Edmonton, AB T5H 0E9
www.capitalpower.com
_____________________________________________________________________________
April 7, 2017
Mr. Matt Ayres
Market Surveillance Administrator
500 – 400 5th Avenue SW
Calgary AB T2P 0L6
Dear Mr. Ayres:
Re: Market Surveillance Administrator (“MSA”) Consultation re Revocation of Offer Behaviour
Enforcement Guidelines
Capital Power provides this letter in response to the Notice to Market Participants and Stakeholders1 (the
“Notice”) that was issued by the MSA on March 17, 2017. The Notice advised that the MSA was considering
potential revocation of the 2011 Offer Behaviour Enforcement Guidelines (“OBEG” or “OBEGs”), and requested
written comments from stakeholders regarding the issue.
Capital Power believes that retaining the OBEGs is necessary to support the effective functioning of Alberta’s
energy-only market framework until the new market framework is in place, currently expected in 2021. To the
extent the MSA’s rationale for potentially revoking the OBEGs appears to largely relate to a view that the
announcement of a transition to a capacity market immediately alters the relevance of and need for the OBEGs
in the current market, Capital Power respectfully disagrees. The OBEGs remain important to the fair, efficient
and openly competitive (“FEOC”) operation of Alberta’s market, and to ensuring a reasonable opportunity for
existing and new investments to earn a fair return within the current market framework. With respect to the
latter, the potential that there may be an expectation on the part of any market agency that new capacity may
not be required until the details of the capacity market are known in no way lessens the need for the current
market to continue to provide effective price signals for existing investments.
Capital Power respectfully submits that the MSA should withdraw or suspend the OBEG review. Doing so would
restore certainty for all market participants regarding this key aspect of the current market framework, and avoid
an extended and unnecessary review that would distract market participant and agency resources and attention
away from the separate extensive consultations that will be shortly underway to determine the design and
details of the capacity market.
Capital Power’s detailed responses to the specific questions posed by the MSA in the Notice are provided
below, following introductory comments that review the background to the OBEGs and discuss the issue of
market power.
OBEG Background
In early 2010, shortly after the Fair, Efficient, Open Competition (“FEOC”) Regulation came into force in Alberta,
the MSA initiated stakeholder consultation regarding market participant offer behavior. At the outset of these
consultations, the MSA held that “the legislative framework is constructed to allow competition, not regulation
(and particularly not quasi-price regulation), to shape market outcomes.”2 As the MSA would later explain in a
filing with the AUC, a driver for developing the OBEG was “to provide additional clarity to market participants
regarding how the MSA would view various types of conduct. This added clarity was intended to further the
1
Market Surveillance Administrator, Notice to Participants and Stakeholders Re: Consultation re Revocation of Offer
Behaviour Enforcement Guidelines (March 17, 2017).
2
Market Surveillance Administrator, Foundational Elements Shaping the Market Surveillance Administrator’s Approach to
Bids and Offers, (27 April 2010), p.1.
FEOC operation of the market.”3 Though the OBEGs themselves are not authoritative in nature and, therefore
have no binding effect on market participants, the MSA further highlighted that the OBEGs were “simply a
clarification of existing legislation from the enforcement perspective.”4
In AUC proceeding 21115, Market Surveillance Administrator Section 51(1)(b) Notice and Application regarding
Historical Trading Reports, the MSA noted that “the OBEG definitely influenced market participant behaviour,
but it didn't change any laws, it didn't change any rules.”5 The MSA characterized the OBEG as an accelerated
learning for the market regarding the MSA’s enforcement stance, stating that “[w]e would have got there
anyway, even without the OBEG.”6 The OBEGs thus established a clear framework for how the MSA would
monitor the competitive health of the market and clarified what conduct would warrant enforcement action. They
provided the MSA and market participants with a common understanding of how to assess what conduct was
and was not permissible in the market. Prior to the OBEGs, all parties, including the MSA, were operating in a
state of uncertainty.7
Respectfully, the MSA’s decision to now review and consider revocation of the OBEG is both untimely and
unnecessary, and would re-establish an element of uncertainty that the OBEGs were in part intended to remove.
Capital Power submits that Alberta’s wholesale electricity market is already facing significant uncertainty
regarding future design, functioning, and fundamentals given the addition of large volumes of out-of-market
renewables, the potential timing of coal unit retirements and/or conversions, and the recently announced
transition to a capacity market. Revocation would be inconsistent with the MSA’s previous determinations and
direction as well as the MSA’s views of the importance of policy continuity and stability to the continued success
of the Alberta market.8 Capital Power submits that it is incumbent on the MSA and agencies to support policy
continuity and stability, which in turn promote investor confidence, within the current market design for the
duration of its existence until the transition to a capacity market in 2021.
Market Power Context and Considerations
It is necessary to also note and confirm the concept of market power as it has been defined and considered by
the MSA within the context of the OBEG and Alberta's wholesale electricity market.
The MSA was clear in the State Of The Market Report 2012 (“SOTM”) and its supporting analysis that market
power has an important role in the effective functioning of Alberta’s existing energy-only market and that “the
existence (or exercise) of market power in any product market is not by itself a cause for concern…competition
concerns only arise if this market power is extended or abused.”9 In the MSA’s SOTM, “market power” is
defined as “the ability to affect the market clearing price.”10 However, the MSA has also articulated that acritical
distinction in the context of market power is between ‘extraction’ and ‘extension.’ The MSA has acknowledged
extraction as permissible and competitive conduct, and as follows – “[s]ingle participant conduct aimed at
capturing surplus (profits) that a market participant has created independent of the conduct’s effect of rivals.”11
In contrast, extension of market power, as described in the OBEGs, refers to “[s]ingle participant conduct that
increase surplus (profits) by weakening or eliminating the competitive constraints imposed by rivals,”12 and such
behaviour would result in investigation and/or potential enforcement action by the MSA. Extension is separate
and distinct from extraction, and is not appropriate in the market.
Examples of extraction – which again the MSA has acknowledged is permissible – include unilateral profit
maximizing behaviours such as economic withholding and portfolio management; provided such actions do not
impede competition or impact the conduct of rivals. Economic withholding is defined by the OBEG as “offering
3
Exhibit 0033.02.MSA1-2155, MSA Information Response to AUC-MSA-2(c).
Ibid, MSA Response to AUC-MSA-2(e). Emphasis Added.
5
AUC ID 21115, Tr. Vol 2, December 7, 2016, p.304, lines 4-6. Emphasis Added.
6
Ibid, p.304, lines 6-7.
7
During the oral hearing of AUC proceeding 21115, the MSA provided the Alberta Utilities Commission panel a brief
background to the development of the OBEGs. See for example Tr. Vol 2, December 7, 2016, p.303, line 11 to p.304, lines
4-15.
8
Market Surveillance Administrator, State of The Market Report 2012, (December 10, 2012), p.1.
9
Market Surveillance Administrator, Measuring Generator Market Power: An assessment undertaken as part of the 2012
State of the Market Report (October 31, 2012), p.iii.
10
MSA, State of The Market Report 2012, p.14.
11
Market Surveillance Administrator, Offer Behaviour Enforcement Guidelines: For Alberta’s Wholesale Electricity Market,
(January 14, 2011), p.9.
12
Ibid.
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available supply at sufficiently high prices in excess of the suppliers marginal and opportunity costs so that it is
not called on to run and where, as a result, the pool price is raised.”13 “Portfolio management” or “portfolio
bidding” refers to a market participant offering its supply in such a way as to maximize the benefit to the market
participant’s portfolio position as opposed to the individual assets. The MSA has acknowledged that these
behaviours are not only permissible, but appropriate offer strategies in Alberta’s wholesale electricity market that
recognize the importance of dynamic efficiency.14 The OBEGs thus acknowledge that the exercise of market
power through such behaviours – subject to effective compliance, market surveillance and enforcement –
supports the FEOC operation of the market.
The rationale for the exercise of market power presented below in response to Question 1 are reflective of the
important role these offer strategies play in the energy-only market, and which have been acknowledged by the
MSA.
Response to the MSA’s Three Questions
1.
Provide reasons for agreement or disagreement with the perspectives that are set out above,
including but not limited to alternative rationales for the exercise of market power.
The MSA’s primary justifications for considering revocation of the OBEG is Alberta’s transition to a capacity
market and the AESO’s view that no new supply is expected until the details of the capacity market are
determined.15 In light of the transition, the MSA expresses a concern that “certain market participant conduct
that results in static efficiency losses” – offer behaviours such as portfolio management and economic
withholding – may no longer result in “dynamic efficiency gains from innovation and investment.”16 Capital
Power respectfully disagrees.
As a preliminary matter, Capital Power notes that past static efficiency losses have been relatively negligible.
The MSA previously estimated these losses and found that for 2008-2011, static efficiency losses “as a
proportion of average pool price are small.”17 Given this, Capital Power submits that the current OBEG review
appears only to focus on new supply investment and ignores the importance of an effective price signal for
existing assets and investments. Stimulating new entry is only one part of the rationale for allowing the exercise
of market power in Alberta’s energy only market. Ensuring a high fidelity price signal and allowing existing
generators the opportunity to recover fixed costs and earn a fair return on/of investment are also necessary.
These two considerations are not new or alternative rationale for the exercise of market power within an energyonly market context. They are foundational arguments supported by the MSA on the public record – most
extensively in the SOTM – and supported by sound economic theory. The rationale remains relevant and valid
for the duration of the energy-only market’s remaining term.
i) Ensuring a High Fidelity Price Signal
Alberta’s pool price is the result of dynamic interactions between market conditions and the behaviours of
market participants. Market participants’ supply offers are matched with demand to determine an hourly price.
The quality of the price signal that results is dependent on its ability to reflect these market fundamentals and to
efficiently direct the choices made by load to adjust demand and generators to shift their offers in a competitive
manner. The MSA has defined a high fidelity price signal as “[a] price signal that is reflective and responsive to
changes in fundamentals such as fuel prices, outages, and supply-demand balance.”18
The pool price, as a consequence of these complex market dynamics, may at times exhibit varying levels of
volatility; however, the MSA has pointed out that this is an important feature of the market and that “what
matters most is that the volatility results from market fundamentals or from participant behaviour that can prompt
a competitive response.”19 Price fidelity and resulting volatility, whether due to market conditions or competitive
13
Ibid, p. 9-10.
Ibid, p. 9.
15
MSA, Notice, p. 2
16
Ibid.
17
MSA, State of The Market Report 2012, p.65.
18
Market Surveillance Administrator, MSA Issue Identification Roundtable: Energy Market Offer Behaviour, (February 2010
2010), Appendix A, p. 1
19
MSA, State of The Market Report 2012, p. 53.
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responses to any exercise of market power, provide the signal to invest in certain types of technologies and not
others.20 This is true both in terms of potential new investment as well as investment in existing assets, potential
re-powering, and retirement decisions.
During the next four years of market transition, generators will continue to require an effective price signal to
make decisions regarding existing investments, such as upgrades, retirements, and potential repowering. The
importance of an effective price signal for retirement decisions was noted in the SOTM and the MSA remarked
that retirements themselves – generally consisting of older and less efficient units – are a useful indicator of
dynamic efficiency gains.21 New supply investments during this timeframe, though generally not viewed as
required or likely, may also still occur in response to unanticipated changes in market conditions.
An effective price signal is also important for signaling demand response and influencing consumer behaviour.
High price fidelity enables efficient consumption decisions by large commercial and industrial consumers
exposed to pool price and may support potential self-supply decisions as well as forward contracting. Such
demand-side responses provide a helpful check on price volatility and market power, as noted in the SOTM.22
In comparing the outcomes of an energy-only market with generator market power and an energy-only market
without market power, the MSA concluded that “[i]n the absence of generator market power, the majority of
generators would be heavily reliant on scarcity rents in order to recover fixed costs,” leading to one of two
possibilities: that scarcity becomes commonplace (a potential supply adequacy concern) or that prices would
need to be very high when scarcity occurs (a problem for both consumers and investors).23 An energy-only
market with generator market power offers “an additional source of rents, i.e., generators can seek to raise the
market price when there is no scarcity event.”24 The MSA described two key implications in allowing the
exercise of market power: “First, prices can be capped at a lower level and fixed costs can still be recovered.
Second, it is important that there are short and longer term competitive forces that check the ability of market
participants to exercise market power.”25 Capital Power believes that such dynamic efficiency gains – increased
reliability, reduced scarcity events, and lower scarcity pricing – should continue to prevail in Alberta’s market,
regardless of the forthcoming capacity market.
The SOTM noted that other jurisdictions without capacity markets have had to introduce higher price caps to
ensure supply adequacy, “whereas in Alberta there has been relatively little concern with future generation
adequacy. The comparatively low price cap in Alberta is accompanied by an acceptance that generators may
exercise market power.”26 It was concluded by the MSA that “If no market power was exercised is it likely that
generation investment would fall, scarcity events increase and generation would be inadequate from the
perspective of reliability.”27 The Alberta market has delivered the required level of supply adequacy, in large part
on the understanding by generators, based on the legislative framework and the clarification provided through
the OBEGs, that certain exercises of market power are legitimate and permissible within individual offer
strategies in order to support having an opportunity to earn a return on investments. Revoking the OBEGs
would represent a significant and unwarranted change in the market framework in these respects.
ii) Ability to Recover Fixed Costs and Earn a Fair Return on/of Investment
Electricity generation in Alberta remains a high fixed cost industry where revenue is obtained only from the sale
of energy into the wholesale market and where generators bear the risk of investment. The MSA explicitly
acknowledged that “[i]t 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).”28 This statement remains as
true today as it was in 2012, and it will remain true until a capacity market is implemented.
Without capacity payments or other revenue streams to cover fixed costs, generators’ sole opportunity to
recover all costs is through the energy market. Therefore, the opportunity to economically withhold and portfolio
20
Ibid, p. 52.
Ibid, p. 66.
22
Ibid, p. 52-53.
23
Ibid, p. 38.
24
Ibid.
25
Ibid.
26
Ibid.
27
Ibid, p. 39.
28
Ibid, p. 4.
21
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bid remain essential parts of the pricing framework in Alberta’s energy-only market. The resulting price volatility
also incents and rewards unique generation attributes such as ramping flexibility. Ensuring incentives for fast
ramping technologies will continue to be important in Alberta market, especially in the light of the forthcoming
out-of-market renewable additions, the first wave of which will come online in 2019, two years prior to new
market opening.
While volatility is an important element of the energy-only market, “[w]holesale volatility doesn’t imply all
consumers should face volatile prices.”29 There are many options available to consumers to manage price
volatility in the market. Residential consumers have access to competitive fixed-price contracts and those that
remain on the Regulated Rate Option (“RRO”) are protected from volatility during the market transition by the
recently announced price cap, expected to be in place until June 2021. Large commercial and industrial
consumers are active in hedging and forward contracting and have the option to self-supply.
2.
Explain whether sections of the existing OBEG remain relevant.
As articulated above, Capital Power believes that the existing OBEGs, specifically Section 2 and 3 of the OBEG
(the “Core”), remain a relevant and important feature of the Alberta market framework. The Alberta market
framework has not fundamentally changed, nor has the underlying legislative scheme. These frameworks are
not expected to change prior to the opening of the capacity market in 2021. As such, and for the reason
presented above, the OBEGs remain as relevant to the Alberta market today as the day they were drafted. The
Core will be central to ensuring fair treatment of existing investments and a healthy market transition in Alberta.
The concepts contained within the Core explain economic principles key to the functioning and sustainability of
Alberta’s existing market structure and their retention and affirmation will be critical to maintaining policy stability
and certainty to sustain investor confidence in the Alberta market. The principles in Section 3, and the OBEG in
general, brought about greater clarity regarding the general approach of the MSA in applying the Fair, Efficient
and Open Competition Regulation to market participant offer behaviour in Alberta’s wholesale electricity market.
The importance of continued stability and certainty in this respect cannot be understated.
It is unclear upon revocation of the OBEG how the MSA’s enforcement stance regarding actions such as
economic withholding and portfolio management would change and what if any measures would be applied to
market participants exercising market power through such actions. Retaining the OBEGs however, would
provide market participants with an established enforcement framework and clear compliance expectations. As
stated in the introductory comments above, providing such guidance was a key reason for the initial adoption of
the OBEGs. Revoking the OBEGs now would be a needless and regressive step, detrimental to the health of
the current market and to investor confidence.
In the Notice, the MSA states that some sections of the OBEG have been rendered unnecessary or obsolete
given changes in market rules and recent AUC decisions, such as the MSA/TransAlta Enforcement Proceeding
(AUC Decision 3110-D01-2015).30 AUC Decision 3110-D01-2015 did not express any broader concern or
indication on the part of the AUC that the OBEGs themselves were not reasonable or appropriate, or that
economic withholding and portfolio management were inappropriate. Rather, the decision upheld the MSA’s
claims that the actions of a single participant were contrary to the FEOC operation as the purpose of that
conduct was to restrict or prevent a competitive response.31 In the parlance of the OBEGs, this is classified as
the ‘extension’ of market power – and not ‘extraction’ - and was found to be unlawful and not permitted under
the framework. In this key regard, the AUC’s decision provides no basis or support for any revocation of the
Core features of the OBEGs.
3.
Explain whether a stakeholder meeting, following the submission of comments, would be desirable
and, if so, what topics market participants wish to focus on and why.
If the MSA indeed withdraws its review of the OBEGs as Capital Power respectfully submits it should, Capital
Power believes that no further process would be required. However, the tentatively scheduled April 12th
stakeholder session would be helpful to provide an opportunity for market participants to better understand the
MSA’s concerns and rationale for initiating this review and discuss potential implications for the market. In any
event, timely resolution of the uncertainty created by the issuance of the Notice is critical.
29
Ibid, p. 5.
MSA, Notice, p. 2.
31
See for example para 649, AUC Decision 3110-D01-2015 (July 27, 2015).
30
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To the extent that the OBEG review has been motivated by a prospective concern on the part of the MSA
relating to the potential termination of PPAs currently held by the Balancing Pool and the resulting changes in
offer control in Alberta, Capital Power submits that the MSA should initiate a separate, specific, and defined
process to address those concerns.
Capital Power appreciates the opportunity to provide its comments on this important initiative. Please contact
me at (780) 392-5167 if there are any questions or if you wish to discuss Capital Power’s comments.
Regards,
Daniel Jurijew
Vice-President, Regulatory and Environmental Policy
cc:
D. James, Alberta Department of Energy
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