Consent Order – Disgorgement Payment – Monetary Penalty – Investigation and Hearing Costs
In this decision, the AUC considered whether it was in the public interest to approve a consent order, proposed by the Market Surveillance Administrator (“MSA”) and TransAlta Corporation, TransAlta Energy Marketing Corp. and TransAlta Generation Partnership (collectively, “TransAlta”), to resolve the remaining issues in Proceeding 3110 and bring the proceeding to a binding and final conclusion.
TransAlta and the MSA proposed to settle the matter through a consent order which includes the following amounts to be paid by TransAlta:
(a) A disgorgement payment of $26,920,814.31;
(b) A monetary penalty of $25 million; and
(c) Payment of the MSA’s investigation and hearing costs on a full indemnity basis in the amount of $4,327,542.29;
(the “Consent Order”).
In phase 1 of Proceeding 3110, the AUC found that TransAlta contravened Section 6 of the Electric Utilities Act and sections 2(h), 2(j) and 4 of the Fair, Efficient and Open Competition Regulation in late 2010 and early 2011.
The MSA filed its application for the approval of the Consent Order pursuant to section 54 of the Alberta Utilities Commission Act (“AUCA”), which allows the MSA and a person named in a notice to agree on the means to resolve all or part of a matter before the AUC, by applying to the AUC.
The AUC cautioned that it could only approve an agreement that was otherwise within its jurisdiction to approve. In Decision 3110-D02-2015, the AUC determined that it had authority to order the payment of an administrative penalty by the person named in a notice from the MSA, and that such payment was expressly payable to the General Revenue Fund pursuant to section 63 of the AUCA. The AUC also determined in Decision 3110-D02-2015 that it had the authority to order a person to pay costs associated with an investigation and hearing initiated by the MSA. As a consequence, the AUC also found that its authority did not otherwise include an ability to order restitution or other compensation in relation to a proceeding initiated by the MSA.
In determining which principles to apply in considering the consent order, the AUC took guidance from the principles developed by the Alberta Court of Appeal (“ABCA”) applicable to joint submissions on sentencing in R. v. G.W.C, 2000 ABCA 333. In that decision, the ABCA determined that courts should not lightly interfere with a negotiated disposition that falls within an appropriate range for a given offence. Therefore, the negotiated disposition must only be rejected where it is contrary to the public interest and may bring the administration of justice into disrepute. The AUC noted that it took a similar approach in Proceeding 1533, which was also a settlement between the MSA and TransAlta under section 44 of the AUCA.
The AUC determined that it must not ask itself whether the Consent Order is the order that the AUC itself would have issued, but rather whether the Consent Order is fit and reasonable, and falls within a range of acceptable outcomes given the circumstances. The AUC therefore held that if it does not approve the Consent Order, it must either refer the Consent Order back to the parties or reject it outright.
The $26,920,814.31 Disgorgement Payment
With respect to the disgorgement payment of $26,920,814.31, the MSA submitted that the payment represented the economic benefits that TransAlta derived from its contraventions. The economic benefits did not reflect costs or losses incurred by TransAlta. Instead, it focused on hours in which pool prices were higher as a result of outage timing. The MSA noted that it did not include any mitigating price impacts that would have occurred during the alternative outage timing.
The MSA noted that the estimates of economic benefits were derived from the expert information prepared for both the MSA and for TransAlta in Phase 1 of Proceeding 3110. The MSA submitted that the magnitude of economic benefit was very similar regardless of which estimates were used.
The AUC referred to section 7 of AUC Rule 013: Rules on Criteria Relating to the Imposition of Administrative Penalties (“Rule 13”). Rule 13 provides that where a person derives an economic benefit as a result of a contravention, the AUC must order that person to disgorge the economic benefit in an amount determined by the AUC to nullify any gains acquired through misconduct.
The AUC was satisfied that TransAlta derived economic benefits as a result of its contraventions and that the public interest requires that any economic benefit be recovered. The AUC found that the MSA’s estimated benefits derived by TransAlta as a result of its contraventions without setting off any related costs or losses was consistent with the intent of section 63(2) of the AUCA by including it as part of the administrative penalty.
The $25 million Monetary Penalty
The MSA submitted that the $25 million figure was a global award taking into account:
(a) TransAlta’s contraventions of the legislation;
(b) The interrelated nature of the contraventions;
(c) The number of days upon which the outages and trading took place; and
(d) That the contraventions arguably extended beyond the days upon which the outages were taken.
The AUC, in considering the magnitude of the $25 million monetary penalty, took guidance from section 4 Rule 13 in providing its findings on the appropriateness of the Consent Order.
The AUC noted that in Decision 3110-D01-2015, it found that TransAlta engaged in conduct that did not support a fair, efficient and openly competitive electricity market when it restricted or prevented its competitors from providing competitive responses, manipulated market prices away from a competitive market outcome and allowed its employee to use non-public outage records to trade in the electricity market. The AUC in this decision found that the contraventions were very serious, having regard to the following factors:
(a) The contraventions resulted in significant and widespread harm to customers by negatively impacting the pool price;
(b) The contraventions resulted in significant financial gains for TransAlta;
(c) The outage contraventions were premised on manipulation, and were part of a scheme that was systematic and persistent;
(d) The portfolio bidding strategy was approved by TransAlta’s senior management at the time;
(e) TransAlta’s vice president of trading and asset optimization, and TransAlta’s vice president of commercial operations and development permitted an employee to trade when they knew or ought to have known that the employee had non-public outage records;
(f) The portfolio bidding strategy was pursued between November 2010 and February 2011;
(g) The outage contraventions were brought about by a complaint from a market participant, and the trading contraventions were discovered by the MSA in the course of its investigation; and
(h) TransAlta had previously breached section 2(h) of the Fair, Efficient and Open Competition Regulation in November 2010 by impeding import transactions.
Regarding matters of cooperation, the AUC observed that Proceeding 3110 entailed extensive disclosure from TransAlta. However, the AUC noted that TransAlta failed to provide some material and relevant documents, including the internal memorandum describing the portfolio bidding strategy, to the MSA, until late 2013. The AUC also noted that TransAlta either deleted or lost some hard drives belonging to relevant persons after the MSA initiated its investigation.
The AUC determined that, while one purpose of administrative penalties is to remove the profit from the offences, there was a legitimate purpose to providing fines in excess of the profit, lest the penalties become a simple ‘licencing fee’ for the offences. On the other hand, the AUC was careful to note that the monetary penalty could not be so large as to be considered penal in nature.
The AUC found that the proposed penalty approached the maximum penalty available under section 63(2) of the AUCA, given the duration of TransAlta’s contraventions. However, having regard to the factors set out above, the AUC determined that the $25 million penalty was fit and reasonable, falling within a range of acceptable outcomes.
The MSA’s Investigation and Hearing Costs
The Consent Order included the MSA’s investigation and hearing costs in the amount of $4,327,542.97. The MSA submitted that this recovery was on a full indemnity basis, as opposed to being recovered on the AUC’s Scale of Costs in Rule 15: Rules on Costs of Investigations, Hearings, or Other Proceedings Related to Contraventions (“Rule 15”). The MSA submitted that recovery of costs on a full indemnity basis served the purpose of providing an element of deterrence to would-be transgressors, given the lengthy and costly investigation into the matter by the MSA.
The AUC was satisfied that the inclusion of the MSA’s investigation and hearing costs in the Consent Order was reasonable and in the public interest, given the complexity, length and novelty of the issues litigated. The AUC also held that Rule 15 authorized it to grant costs in excess of the Scale of Costs and accordingly held that the proposed costs in the Consent Order were reasonable.
Other terms
The MSA submitted that the Consent Order included provisions that TransAlta must pay the following amounts within the following time frames:
(a) The disgorgement amount must be paid, along with the MSA’s hearing and investigation costs within 30 days of the date upon which the consent order is approved; and
(b) The monetary penalty must be paid within 395 days of the date upon which the consent order is approved, plus any applicable interest pursuant to the Judgment Interest Act.
TransAlta submitted that it required additional time to pay the monetary penalty given the magnitude of the penalty, submitting that a single payment could lead to a downgrade of its debt instruments by credit rating agencies, which would in turn have a deleterious effect on TransAlta’s operations.
The AUC held that the terms and conditions described in the Consent Order were appropriate, and determined that any risks associated with a staged payment had been appropriately addressed by the parties by requiring the provision of an irrevocable letter of credit until such time as the monetary penalty is paid.
Conclusion
The AUC found that the approval of the Consent Order was in the public interest. The AUC also held that the payment of the MSA’s investigation and hearing costs on a full indemnity basis was warranted in the circumstances. While the AUC considered the magnitude of the penalty at approximately $56 million to be considerable, it also held that it was a proportional response to the seriousness of TransAlta’s contraventions of the statutory scheme. The AUC determined that the approval of the Consent Order would promote regulatory compliance and achieve effective
