Market Surveillance Administrator (MSA) Draft Offer Behaviour Enforcement Guideline

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1 10065 Jasper Avenue Edmonton, AB T5J 3B1 Canada December 17, 2010 Harry Chandler Market Surveillance Administrator Suite 500, Street SW Calgary, AB T2P 0L6 Dear Mr. Chandler: Re: Market Surveillance Administrator (MSA) Draft Offer Behaviour Enforcement Guideline On November 26, 2010, the MSA released a draft version of its Offer Behaviour Enforcement Guideline (the Guideline ) for stakeholder comment. Capital Power welcomes the opportunity to provide its views on the Guideline and offers the following comments and questions to aid the MSA in refining the document. We continue to be supportive of the MSA s focus on the long term dynamic efficiency of the market and view this perspective as appropriate and positive for the wholesale electricity market. Three areas on which Capital Power would like to provide feedback are the standard of proof for cases of tacit collusion, the intent requirement for conduct that restricts or prevents competition, and implementation of the Guideline. We also provide comments on discretionary outages and Power Purchase Arrangements ( PPAs ), followed by a number of clarifying questions. 1. Standard of Proof for Cases of Tacit Collusion Capital Power is concerned that the MSA s guideline does not adequately differentiate between tacit collusion and conscious parallelism. The MSA stated: Parallel conduct coupled with facilitating practices may be sufficient to conclude that an agreement was concluded between the parties. (Page 12) In the case of tacit collusion this would be discharged if one is able to infer an agreement from the evidence of a course of conduct, with or without direct evidence of communication among the parties. (Page 14) The MSA s guidance and the Competition Bureau s Competitor Collaboration Guidelines dated December 23, 2009 both state: Recognize that an agreement can be inferred from the existence of a conspiracy, agreement or arrangement from circumstantial evidence; and

2 Do not require direct evidence of communication between the parties to the agreement. However, the Competition Bureau specifies that the standard of proof for the existence of an agreement is that it must be proved beyond a reasonable doubt 1. The MSA did not include such guidance in the Guideline. Is the MSA s view that a lower standard of proof (balance of probabilities) will be applied? The Competition Bureau s higher standard of proof would require substantial circumstantial evidence to infer an agreement. 2. Conduct Intended to Restrict or Prevent Competition The MSA has taken the view that conduct covered under subsection 2(h) of the FEOC Regulation would not require intent 2. Capital Power disagrees with the MSA s view. Paragraphs (i) and (ii) under subsection 2(h) both require intent suggesting that the specific examples of conduct covered under subsection 2(h) are intent-based. Furthermore, the language in subsection 2(h) is explicit in requiring more than one action for a contravention of the subsection. 3. Implementation Process Capital Power found the examples provided in the Guideline helpful and instructive. We encourage the MSA to continue providing ongoing guidance on offer behaviour through examples and MSA commentary. We recommend that the MSA catalogue all of these examples and MSA commentary in a single document to help market participants more easily find this information. (At this time, MSA guidance and views are contained in multiple documents which makes it more difficult to keep up-to-date). The Guideline or a supplementary document with the examples could be treated as a living document that is continually updated with new information as required. Capital Power also asks the MSA to be absolutely clear with the market about the effective dates for the new Guideline document. These dates should be provided sufficiently in advance of their effectiveness to provide the market adequate time to prepare for the prospective changes in MSA guidance. It is not just for the MSA to share this information asymmetrically (to some participants and not to others) nor is it appropriate for the MSA to provide the market no advanced notice when a change (such as revoking previous guidance) could significantly change the manner in which market participants behave in the market. Such practices create regulatory uncertainty and can have negative impacts on the FEOC operation of the market. Outage Scheduling and Power Purchase Arrangements In the Guideline, the MSA provided examples of outages taken at the discretion of the owner for an asset where offer control is also held by the owner. In these cases, the owner makes a management decision considering the impact of a loss of generation output on its portfolio position and the potential impact of the outage to the market and bears the risk of those decisions. The key assumption in the MSA s examples is that the outage impacts the owner s portfolio position and has no direct impact on other participants. The owner s position in the market changes but the change reduces the owner s influence on the market (becomes shorter and lower the owner s market power). PPAs can create a different set of issues with the potential for market power abuse and anticompetitive conduct. Capital Power believes the MSA should apply heightened scrutiny of 1 45(3) of Competition Act. 2 Page 13 of the Guideline states: Restricting or preventing competition, a competitive response or market entry The provision suggests no requirement for intent. Similarly, the provision does not require a demonstrable effect upon price or other market outcomes, beyond that competition or competitive response is hindered.

3 discretionary outages involving PPAs to ensure that the Owner is not behaving in a manner contrary to the FEOC. Regulation. The issue arises because the PPA Owner does not have offer control over the unit which it owns. In such a case, a discretionary outage will have impacts beyond the Owner s portfolio position and may, in fact, directly impact the portfolio position of the PPA Buyer, which has the rights to offer the output from the unit into the market. The PPA allows the PPA Owner to make a unilateral decision to physically withhold the output of the unit at a time that may benefit the Owner s portfolio. Capital Power believes this behaviour, by itself, does not contravene the FEOC Regulation or the Competition Act. However, Capital Power is concerned about the PPA Owner s ability to make a unilateral decision to withhold the physical output of a PPA unit or a number of PPA units at a time that benefits it, but which can significantly harm the PPA Buyer(s) and the market. As stated above, this strategy is relatively risk-free for the Owner but can cause serious harm to the market and the PPA Buyer(s). The timing of the outage has the potential to reduce the Buyer s supply position, and effectively increase the position of the Owner in the market. This may have the effect of causing the Owner to have market power. This is contrary to the intent of the PPAs, which were crafted to mitigate the market power of the owners of units subject to regulation prior to It is also problematic, in that the PPA Owner has very little risk under the PPA for this behaviour, as it is only required to reimburse the PPA Buyer at the rolling average pool price for the previous month (RAPP). This is a structural problem in the market which the MSA has the mandate to address. Market impacts are not appropriately dealt with by mechanisms between the parties which attempt to keep the parties whole; rather they are within the purview of the MSA. PPAs include provisions that attempt to keep the parties whole in the event of outages. PPAs use RAPP to address the potential opportunity cost to the Buyer of losing its committed generation. However, this remedy cannot and should not address anticompetitive conduct or market power issues. The PPAs present a unique set of problems under the MSA s current interpretation of the FEOC Regulations and Competition Act. A PPA Owner that is acting in a manner which prevents competition or manipulates market price would likely fall under FEOC Regulation subsection 2(j). Under the FEOC Regulation subsection 2(j), a market participant may not manipulate market prices, including any price index, away from a competitive market outcome. Competitive market outcome is defined by the MSA to include a range of outcomes that may even involve static efficiency losses. The MSA also states that evidence of a market participant taking action to constrain or prevent a competitor s response means there can be no competitive market outcome. PPA Owners who are long in the market, could set prices high by withholding the output of a unit or a number of units from the market and, in fact, incur gains to their overall position. This behaviour could also have the effect of eliminating, disciplining, or deterring entry by competitors in the long run. As stated above, the intent of the PPAs was to prevent market power by certain generation owners. The MSA has described its willingness to review market conduct and decide whether to pursue rule/regulatory changes in order to prevent harm that can not be otherwise addressed by the FEOC Regulation or Competition Act. Capital Power believes the best way to address potential anticompetitive conduct related to the PPAs is a separation of decision making power for discretionary outages from portfolio managers. Portfolio managers for PPA Owners should be given outage information at the same time as the rest of the market participants, and the decision of when to take the outages should be based solely on reliability considerations and plant needs.

4 At the very least, Capital Power asks the MSA to provide further clarity on how behaviour related to PPAs will be pursued, and if necessary add to its interpretation of current regulation and statutory text. Clarification Questions Capital Power would like to pose some clarifying questions on other matters raised in the Guideline. 1. Preamble: The MSA will work to support the Competition Bureau s Immunity Program under which businesses or individuals who are first-in may approach the Bureau and request immunity in return for cooperation 3. Request 1: Please clarify that the MSA intends to support the Competition Bureau s Immunity Program only and does not seek to develop its own form of an immunity program. Capital Power agrees that the MSA should support the Competition Bureau s Immunity Program. However, we do not see a need for the MSA develop its own immunity program. The MSA already has broad powers of investigation and can compel market participants to cooperate in an investigation. Furthermore, the MSA has been provided the discretion to show leniency in the penalties it seeks to enforce against market participants. For these reasons, a separate MSA immunity program is unnecessary. 2. Preamble: Even in the absence of anticompetitive conduct, the MSA would be concerned if we observed outcomes that we believe are inconsistent with a workably competitive market 4. Request 2: Please provide a definition of a workably competitive market. 3. Preamble: Subsection 2(h) applies broadly and is not limited to restriction of competition on current market participants and includes both actual and potential competitors 5. Request 3: Please confirm that the MSA means potential competitors refers to potential new entrants and that the MSA did not intend potential competitors to be some other hypothetical, fictitious market participant. 4. Preamble: The collusion is to be between market participants, but this would include a so called hub-and-spoke conspiracy, where a central mastermind, or hub, controls numerous spokes, or secondary co-conspirators. In this case the hub need not be a market participant 6. Request 4: Please provide an example of a hub-and-spoke conspiracy. Request 5: It would also be helpful to understand how the MSA might handle such a case. The MSA mentions that the hub, the party largely responsible for coordinating the act, need not be a market participant. In such situations, would the MSA pursue the hub? It would also be helpful to understand what authority the MSA may draw on to pursue enforcement on a party that is not a market participant. 3 Page 11 of the Guideline. 4 Page 10 of the Guideline. 5 Pages of the Guideline. 6 Page 14 of the Guideline.

5 5. Preamble: Evidence of a market participant taking action to constrain or prevent a competitors response means there cannot be a competitive market outcome 7. Request 6: Subsections 2(h) and (j) each reference concepts related to competition, competitive response, and competitive market outcome. It is likely that the evidence for one contravention could be used to make a case against a market participant under a different subsection. In such instances, will the MSA be pursuing a market participant for multiple contraventions? 6. Preamble: Request an interim order under subsection 8(5)(c): Depending on the assessment of the situation, the MSA may also apply to the Commission for an interim order under subsection 8(5)(c) of the AUCA until such time as a more permanent remedy may be put in place. 8 Request 7: Please provide further information about what the MSA may apply to the Commission for. Is the MSA suggesting that they would make recommendation to rule changes that they would ask the Commission to apply does this not circumvent the rules making process? If you wish to discuss Capital Power s comments further or need any other assistance, please contact me directly at (403) or by at lmeyer@capitalpower.com Sincerely, <Unsigned> Lynn Meyer Vice President, Regulatory Affairs Capital Power Corporation 7 Page 15 of the Guideline. 8 Page 18 of the Guideline.