The Stanwell Decision

Articles Written by Anthony Groom (Partner), Amanda Seaton (Consultant)

The case of Australian Energy Regulator v Stanwell Corporation Limited concerned a prosecution in the Federal Court of Stanwell Corporation for an alleged breach of the requirement under the National Electricity Rules that rebids be made in good faith. The prosecution was unsuccessful. The outcome in this case raises questions about the future shape of the good faith requirement in the Rules. The AER has indicated that it intends to closely examine the judgment and consider its implications.

Background

22-23 February 2008 were days of extreme heat in Brisbane. Electricity demand was high, reaching a record level for a weekend on 23 February of 8000 MW. Spot prices, which under the Rules are set in half-hour intervals, also reached high levels on those days, peaking at $9,561/MWh on 22 February and $9,153/MWh on 23 February. Those high prices were not forecast in the 4-hour ahead or 12-hour ahead price forecasts for the corresponding periods.

As it was required to do by the Rules, the AER investigated and reported on the high prices, noting that a number of generators in Queensland had altered their initial offers to the market, either moving generation capacity into higher price bands or withdrawing some capacity from the market altogether. The report resulted in a further investigation of rebids on those days, ultimately leading to the AER taking action against Stanwell Corporation.

The Rules

Under the Rules, generators bid their available capacity into the market and can allocate their available capacity to different price bands bid in the bid. Clause 3.8.22(b) of the Rules permits market participants to make rebids but only so as to alter the allocation of capacity among price bands and not to alter the prices. Rebids must also comply with clause 3.8.22(c) and 3.8.22A. 

Clause 3.8.22(c)(2) requires that a rebid be accompanied by a "brief, verifiable and specific reason" for the rebid and specify the time of the event/occurrence which was the reason for the rebid.

Clause 3.8.22A(a) requires rebids (as well as dispatch offers and bids) to be made in good faith. Clause 3.8.22A(b) states that an offer/bid or rebid is taken to be made in good faith if the party making it had a "genuine intention to honour that offer, bid or rebid if the material conditions and circumstances upon which the offer, bid or rebid were based remain unchanged until the relevant dispatch interval."

The AER's case

The basis of the AER's case, as described in the judgment, was that rebids made by Stanwell Corporation on 22-23 February 2008 were not made in good faith. This was because, according to the AER, the rebids were made with the intention that, if the dispatch price did not rise sufficiently as a result of the rebid, Stanwell Corporation would make a further rebid for the relevant trading interval. In the AER's view a rebid made in such circumstances was not accompanied by an intention that the rebid be honoured absent a change in material conditions or circumstances.

The relevant bids challenged by the AER involved Stanwell Corporation moving capacity between price bands. It was acknowledged by all parties this was done to move power dispatched by the market operator into higher price bands thereby increasing the spot price. The reasons for the challenged rebids provided to the market operator (then NEMMCO now AEMO) were generally "Portfolio optimization: change MW distrib".

The AER did not challenge that Stanwell Corporation was entitled to rebid in such manner. However the AER took the view that because Stanwell Corporation's traders had in mind the possibility that, if the spot price did not rise sufficiently as a result of a rebid, they would further rebid then the first rebid was not made in good faith.

Each rebid on which the AER based its case was followed by a subsequent rebid. The AER sought to show that the subsequent rebids demonstrated a lack of good faith when the original rebids were made.

The AER also argued that the reference in 3.8.22A(b) to material conditions and circumstances remaining unchanged meant objective conditions and circumstances remained unchanged. An unchanged (or insufficiently increased) dispatch price was not a change in circumstances.

The court's findings

The court held that clause 3.8.22A looks to the totality of relevant conditions and circumstances on which a rebid is based, reflecting the fact that dispatch prices reflect a combination of factors. The clause did not focus on individual circumstances and a generator did not have to show an individual factor had changed to justify a rebid. This reflected the practical reality that rebids would usually be made on the basis of a combination of conditions - the overall conditions in the market.

The relevant conditions and circumstances include the prevailing dispatch prices. Both a change in the dispatch price and a constant dispatch price could be a change in conditions and circumstances. The dispatch price, whether changing or constant, conveys information about conditions in the underlying market.  

For the court to find an absence of good faith the AER had to demonstrate, on the balance of probabilities, that the trader (rebidding for the market participant) did not have a subjective intention that a rebid be honoured at the time it was made. If such intention (i.e. that the bid be honoured) was present then the bid was made in good faith.

In the case of Stanwell Corporation's traders the AER had not established that they had no intention to honour their rebids. Further the necessary material changes in condition were present, as represented by changes in market conditions as conveyed by the dispatch price. Indeed the court appears to regard much of the activity under scrutiny in the case - including rebidding to put pressure on the dispatch price - as a natural and expected outcome of the Rules and indeed necessary for the successful operation of the market. The court noted that price spikes were contemplated by the market design and also that many generators relied on the expectation of high prices during limited periods of a year as the means to recover their investment.

The AER had argued that where the traders knew of the possibility they may rebid if their first rebids did not achieve their objectives, the first rebid was not made in good faith. The court rejected this approach, holding that the mere fact there would have been a possibility in the trader's minds they might rebid if their objectives were not achieved did not show absence of good faith. The AER needed to prove more than this - it needed to show an absence of intention to honour the first rebid at the time it was made.  The court stated:  "a rebid may be an honest assessment of all of the conditions and circumstances known to the trader, and yet he or she may still believe that he or she could rebid for some part of the same Trading Interval, if a desired price increase is not realized.  Such a belief may not necessarily be accompanied by an intention to do so."   

The AER also sought to challenge the evidence of the traders concerned about what data the trader acted on in making each rebid and because much of the evidence was a later reconstruction of events. The court accepted as inevitable a degree of reconstruction given the nature of the evidence and the time since trading had taken place.  The court gave weight to evidence supported by each trader's log book and in general accepted each trader's own assessment of what information was significant in making each rebid.

Extrinsic Material

A further point of interest considered in the case was when extrinsic material can be considered in interpreting the Rules.

To support its interpretation of clause 3.8.22A the AER sought to rely on various extrinsic material, in particular NECA's submission to the ACCC seeking authorisation under the Trade Practices Act 1974 when clause 3.8.22A was introduced into the Rules and the ACCC's determination. While acknowledging it had a discretion to consider this extrinsic material the court determined not to so exercise that discretion. The court emphasised the desirability of persons being able to rely on the ordinary meaning of a clause and not having to review extrinsic material to determine its meaning. It also considered that communications between two regulators were unlikely to be a reliable guide to construction of a clause.

Implications

The decision provides some guidance to market participants about how the good faith requirement applies in the context of a rebid. 

A rebid made in the knowledge that a second rebid will definitely be made would not be made in good faith because there was never any intention to honour the first rebid.  However a rebid made conscious that a second rebid may be made if the first rebid does not achieve the desired impact on price is not, simply on those facts, a rebid made in bad faith. Whether a rebid made in the knowledge a second rebid will probably be made (or more likely than not be made) is made in bad faith remains an open question.

The AER has indicated it is "disappointed" with the decision and it may well seek to amend the Rules in response to the decision. The AER appears to take the view that there must be an identifiable change in objective circumstances to justify a rebid. 

Further while the judgment is well reasoned, it is important to note that the case is the decision of a single judge and certainly there is the potential that another judge or appeal court may read the Rules in a manner more aligned with the AER's view.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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