Power market high wire act for generators

A sideshow, yet a good reminder

In December last year, the Federal Court dismissed a class action alleging that Queensland’s State-owned generators misused their market power to drive wholesale power prices higher.

This was a somewhat expected outcome, given the way Australia’s east coast electricity market operates, previous findings of regulators during market studies, and how competition law has traditionally been applied in Australia, including in previous trading, misuse of market power and merger control cases in the energy sector.

Moreover, there have been changes in the prohibition against misuse of market power and the introduction of other sector-specific regulation in recent years, meaning that generators already approach bidding differently.

However, the decision has been appealed to the Full Federal Court. Until the appeal is determined, the Federal Court’s decision provides important reminders about the balancing act for generators in operating for commercial gain within the bounds of the market design, without engaging in (or being perceived to have engaged in) strongman tactics.

Stillwater’s case

Stillwater Pastoral Company Pty Ltd (Stillwater) claimed that Stanwell Corporation Ltd (Stanwell) and CS Energy Ltd (CS Energy) engaged in misuse of their market power in contravention of s 46 of the Competition and Consumer Act 2010 (Cth) (CCA).

Stillwater claimed that Stanwell and CS Energy, the two largest generators in the Queensland region of the National Energy Market (NEM) and State-owned corporations: 

• had a substantial degree of market power by virtue of enjoying advantages relative to other potential suppliers of wholesale electricity in or into the Queensland region of the NEM; and
• took advantage of that market power for the purposes of deterring or preventing other generators from engaging in competitive conduct, by engaging in short notice rebidding, namely placing rebids that repriced formerly lower price volumes of electricity to very high prices and delaying placing those rebids until just before the bidding window closed, such that other generators had no, or insufficient, opportunity to respond.

While this case applies the previous formulation of s 46 (prior to November 2017), the Court’s findings will still be relevant to the current formulation. However, it is now only necessary to show that a generator with a substantial degree of market power engaged in conduct that had the purpose or effect of substantially lessening competition.

Key findings of the Federal Court

• CS Energy and Stanwell compete in a Queensland-wide market, with some constraint offered by electricity passing to and from New South Wales.
• Stanwell and CS Energy are not related bodies corporate, even though both are owned by the State of Queensland.¹
• Neither Stanwell nor CS Energy, individually or together, had a substantial degree of market power.

There were significant constraints on their conduct, including: 

1. the regulatory constraints from the supervision of the lion tamer (the Australian Energy Regulator) and the ringmaster (the Australian Energy Market Operator), the application of the National Energy Rules (NER) and the oversight / direction of the Shareholding Minister; and 

2. the market and operational constraints arising from the inherent complexity and uncertainty of trading activities, bidding behaviours of other generators, aging technology of power stations, ramp rates of alternative technologies, physical limitations of large coal-fired power stations, carbon tax liabilities / emissions constraints and increases in costs of coal and freight etc.

There was limited ability to set higher prices: almost all Queensland generators made rebids akin to short notice rebidding from time to time (and as permitted by the NER) and the alleged occasions on which either generator successfully spiked the price, these were transient in nature. 

There were other constraining factors: These included the generators’ contract position to risk only their dispatch margin, being baseload generators (and having to continue generating even at low prices) and not having any greater ability than any other generator to ensure dispatch instructions (given NEM bid stack algorithms). 

Without proving market power, it was not possible for the class action to succeed.

• The Court also did not accept Stillwater’s evidence regarding the impugned conduct. There was no problematic strategy of short notice rebidding by either Stanwell or CS Energy. The Court observed that both generators are for-profit entities, both with individually developed strategies to make profit in the summer months, when there is high demand, price volatility, extreme temperature forecasts, competitor plant outages, interconnector binding and / or other transmission constraints. Absent these profit-maximising strategies, the generators’ budgeted gross margins to cover marginal costs were at risk (and, therefore, so was their ability to maintain their plant to keep generating). There was also no evidence that either generator deliberately delayed bids to manipulate prices (rather the evidence supported the content of their rebid reasons). 

Generator balancing act

In practice, the outcome of Stillwater v Stanwell (so far) does not tell electricity generators much more than they already knew – which is that NEM participation can be a high wire feat. It requires an artful juggle of the overlapping laws and rules, whilst pursing legitimate commercial interests, to ensure that the market operates as designed.

Generators must manage the overlay of:

• The requirement to make PASA (projected assessment of system adequacy) updates, dispatch offers, dispatch bids and rebids in accordance with the timeframes and requirements of the NER.
• The misuse of market power prohibition in the CCA.
• The energy market misconduct prohibitions under the CCA (as summarised in our previous article) (these were not in place at the time of the conduct alleged by Stillwater (which occurred in 2016). They are due to sunset next year, unless extended by Parliament).
• The good-faith bidding obligations under the NER.
• The requirements to comply with AEMO dispatch instructions.

As such, generators should have regard to the following key principles.

1. Generators must not make bids and rebids that are fraudulent, dishonest, false / misleading, deliberately late, in bad faith or for the purpose of distorting or manipulating NEM prices.

To guard against this:

(1) Ensure all bids, dispatch offers and rebids are as accurate as possible to minimise rebidding.

(2) Genuinely intend to honour any offer, bid or rebid at the time of submission.

(3) Whilst rebidding allows generators to adjust bids in response to unforeseen events or market conditions and is an important risk management tool, rebids may only be made where:

(a) there has been a change to the material conditions or circumstances upon which the initial bid was based.

(b) the change gives rise to a legitimate reason to change the bid.

(4) Submit rebids as soon as practicable.

(5) Always record a valid reason for a rebid.

(6) When planning plant shutdowns or reductions in availability, do so in a way that minimises the need to rebid (and the ‘swing’ of the rebid) as much as possible.

2. Purpose is important in derivatives too.

When offering / not offering electricity financial contracts (i.e. those contracts where rights are related to the price of electricity on the spot market), do not, for an anti-competitive purpose, fail to offer, limit or restrict offers for, or offer unacceptable terms for, such contracts. This supports generators having established contracting approaches for electricity financial contracts and, where possible, offering counterparties in like circumstances, like terms.

3. Risks are amplified where a generator is large.

The prospect of conduct impacting competition (or being inferred to have that purpose) is higher where a generator has a large share of the market or other unique market position. When the strongmen flex during peak hours, prices can follow suit.

This is not a comprehensive list of all applicable requirements under the National Electricity Law, NER or CCA. We work regularly with generators to draft policies and operationalise compliance with the interacting regulatory frameworks. Please contact us for more information.