- At a time when energy prices are an increasingly hot topic, the Australian Energy Regulator (AER) recently failed in its case against energy traders who the AER alleged were seeking to drive up electricity prices without the good faith required by the trading rules that govern the National Electricity Market (NEM).
- In his decision in Australian Energy Regulator v Stanwell Corporation Limited  FCA 991, Justice Dowsett held that certain ‘rebids’ made for the purpose of increasing wholesale electricity prices were not lacking the good faith required by the National Electricity Rules (NER).
- The decision provides an interesting insight into the way electricity is traded in the NEM and exposes detailed facts which the AER considered (but which the court disagreed) exposed a lack of good faith in trading.
- The central issue in the case concerned whether subsequent rebids demonstrated the lack of good faith of a previous rebid.
- The AER also sought to rely on extrinsic material from the ACCC as to the intended scope of the good faith clause. The court rejected this evidence on the basis that the ACCC’s documents did not help to interpret the good faith requirement.
- In a number of public statements following his recent appointment as ACCC chairman, Rod Sims has made it clear that electricity prices will become a focus area for the ACCC as well as the AER. Relevantly in the context of the Stanwell decision, Mr Sims has also stated the ‘AER and ACCC will be active in monitoring the wholesale spot market for illegal bidding and market manipulation’. We await with interest future directions in this area in light of the court’s decision.
Operation of the NEM
The Australian Energy Market Operator (AEMO) has responsibility to accept or reject offers by generators to supply electricity to the NEM. Stanwell Corporation is the largest of nine generators selling electricity in the Queensland region of the NEM.
Under the NEM trading arrangements AEMO seeks to track electricity demand and match it with economical supply. On the supply side, generators bid for shares of the market by offering to supply electricity at particular prices. Each generator submits its bid for a 24-hour period on the previous day, by offering specific electricity volume in up to 10 price bands. On the day in question, generators can, by ‘rebidding’, vary the amount of generation available in each band.
Rebidding is performed by traders acting for the generators with trading occurring in five minute dispatch intervals (for which there is a dispatch price) which themselves fall within 30 minute trading intervals. The price all generators receive is that of the highest band accepted at any given time.
The specific facts
On two days of high electricity demand in February 2008, traders acting for Stanwell used rebids to move electricity supply between low and high price bands in an effort to increase revenue based on price and volume. In most of the challenged instances, the traders made an initial rebid which failed to raise the price and then made a subsequent rebid (moving more supply to a higher priced band) which resulted in a higher price.
The initial rebids in these scenarios were impugned by the AER as lacking good faith.
Decision on good faith
Under Rule 3.8.22A of the NER, scheduled generators and market participants are required to make dispatch offers, dispatch bids and rebids in good faith. Further, they are taken to be made in good faith if, at the time they are made, the scheduled generator or market participant has a genuine intention to honour the offer, bid or rebid, if the material conditions and circumstances upon which it was based remain unchanged.
The AER argued that between the initial and subsequent rebids there was no change in relevant circumstances and thus the subsequent rebid evidenced the fact that the initial rebid was not made in good faith. It submitted that each trader, in making the initial rebid, had in mind that if the price did not rise sufficiently another rebid would be made. It then further submitted that this state of mind demonstrated that the initial rebids were not made in good faith.
Justice Dowsett did not agree and adopted a different approach to that of the AER when assessing the balance between the legitimate self interest of the generators and bidding without good faith. Key observations arising from the decision are:
- The law sets up a market mechanism for the trading of electricity and by definition a market is made up of potential buyers and potential sellers, each trying to maximise its own benefits from the transaction. Accordingly, parties were entitled to act in their own interest. A key issue was the extent to which the good faith requirement in Rule 3.8.22A restricted the pursuit of self-interest.
- In this respect, the primary issue was the state of mind of a trader at the time of making a rebid and whether the trader had the requisite intention to honour the bid.
- It may be possible to infer, from the conduct of a trader, that the requisite intention was absent. While the fact that the trader made a subsequent rebid for the same trading interval could provide the basis for an inference, this did not necessarily follow.
- A rebid may be an honest assessment of all of the conditions and circumstances known to the trader and yet the trader may still believe (while not intending to do so) that it could rebid for some part of the same trading interval if it did not secure a desired price increase. The fact that the trader had the belief it could rebid but not the intention to rebid meant that there was no basis to infer that the trader lacked an honest intention to honour the rebid in the absence of a change in material conditions and circumstances.
- Justice Dowsett also noted:
In any event… the unchanged dispatch price was either, itself, a change in material conditions and circumstances, or evidence of such change,
Accordingly, the fact that the dispatch price had (or had not) changed between the rebids negated the ACCC’s assertion that there was no change in circumstances with the result that a subsequent rebid evidenced bad faith in the previous rebid.
Decision on admissibility of evidence from the ACCC
For those interested in statutory construction, there is an interesting element of the decision concerning an attempt by the AER to rely on the ACCC’s views as extrinsic material.
The AER sought to rely on extrinsic material for the purposes of the proper construction of Rule 3.8.22A, principally documents that the ACCC had produced regarding changes to the then National Electricity Code (which regulated the NEM prior to the NER). These changes inserted a clause almost identical to Rule 3.8.22A. The ACCC documents showed that the clause was sought to be introduced to address concerns that generators were creating ‘price spikes’ by strategic withdrawal of capacity.
The National Electricity Law (NEL) provides that extrinsic material can only be used to interpret a provision:
- if the provision is ambiguous
- if the ordinary meaning leads to an absurd or unreasonable result, or
- to confirm the interpretation conveyed by the ordinary meaning of the provision.
Justice Dowsett held that there was no ambiguity or unreasonable result, and therefore the extrinsic material could only be used to confirm the interpretation of the ordinary meaning.
The NEL also provides that in determining whether to consider extrinsic material, regard should be had to the desirability of a provision being interpreted according to its ordinary meaning. Justice Dowsett considered that it was important in this case that the provisions be interpreted as having their ordinary meaning and that consideration of ACCC documents in order to depart from the ordinary meaning of the words might well cause serious injustice to persons who have relied on the law as published. He also noted that a further consideration was that these statements were made by the ACCC and not by the regulator responsible for making the relevant rules (previously the National Electricity Code Administrator and now the Australian Energy Market Commission).