30 October 2006
Key Points:
AGL incurs $20,000 penalty for misuse of the inflexibility and rebidding provisions of the National Electricity Rules.
AGL Hydro Partnership ("AGL Hydro") has been served with an infringement notice from the Australian Energy Regulator (the "AER") to the amount of $20,000 for breaching the inflexibility provisions of the National Electricity Rules on 22 March 2006. The infringement notice alleged that AGL Hydro Partnership contravened clause 3.8.22(C)(2)(i) of the Rules (the "Inflexibility Rule") by failing to provide a verifiable and specific reason for the rebid and declaring the MCKAY1 generating unit as inflexible.
On 22 March 2006, the dispatch price in Victoria and New South Wales increased at the end of the relevant trading interval and the MCKAY1 generating unit operated by AGL Hydro, was dispatched at 100MW. In the subsequent trading interval, the dispatch price decreased and the generator was targeted for dispatch back to zero for the next three trading intervals. During this time, AGL Hydro rebid the generator as inflexible for two trading intervals at a loading level of 100MW and the reason given for this was to optimise ancillary services and energy dispatch. The AER argued that this reason did not specify or verify the abnormal operating conditions that must have existed for the MCKAY1 generator to rebid under clause 3.8.19(a) of the Rules.
There has only been one prior incident of the breach of the Inflexibility Rule that has resulted in a penalty which was to Macquarie Generation, and this is the first time the AER has used its new powers to issue an infringement notice under section 74 of the National Electricity Act 1996.
Clause 3.8.19 allows generators to rebid dispatch inflexibilities in circumstances when they are unable to follow dispatch instructions due to "abnormal plant conditions or other abnormal operating reasons in respect of the scheduled unit". Clause 3.8.22 then provides that the generator must specify the loading level at which the generator can operate. To prevent the misuse of this power, at the time of the rebid, the generator must provide NEMMCO with a "brief, verifiable and specific reason" for the rebid under clause 3.8.22(c)(2)(i). The practical result of this is that a generator that declares itself inflexible is treated outside the usual operating arrangements and NEMMCO must dispatch the generator at the load level specified in the rebid, regardless of the price offered by the generator for that capacity.
The incentive for generators to bid inflexible is that it could provide a commercial advantage to the generator over its competitors, who are operating under the normal market conditions in ensuring that more of their generation is dispatched in high price periods. This may lead to additional revenue or reduce losses which would otherwise be sustained under hedge contracts.
The AER Chairman, Mr Steve Eadwell states that he believes that this is why it is essential that the inflexibility provisions are only used where abnormal conditions actually do exist, as if generators incorrectly declare themselves to be inflexible, it can potentially impact the dispatch of the market and adversely affect the safe and secure operation of the entire power system.
This demonstrates the seriousness with which the AER views the misuse of the inflexibility provisions and the infringement notice issued to AGL Hydro, the first issued under the new electricity laws, shows that the AER is more than willing to enforce the provisions.
Under the previous electricity law, this power was held by the National Electricity Code Administrator ("NECA"). In the event of a breach of the equivalent provisions under the National Electricity Code, NECA would make an application to the National Electricity Tribunal, who would then declare the result and if warranted, impose a penalty. The previous circumstances arose when Macquarie Generation effectively dispatched inflexible its entire capacity for the majority of the trading intervals over the two days on the 19 and 20 December 2001. The reasons given for this were "adjustment to seek improved profitability" and "adjust contract positions". On 2 May 2002, the National Electricity Tribunal declared that this constituted a breach of the inflexibility provisions and imposed a civil penalty of $10,000.
However, since the National Electricity Law was amended with effect from 1 July 2005, the AER has the power to issue infringement notices to a registered participant stating the nature of the breach, who have the option to either pay the penalty or ignore the infringement notice and defend any proceedings in respect of the breach.
The infringement penalty for a breach of a relevant civil penalty provision is $4000 if committed by a natural person or $20,000 if committed by a body corporate, or any lesser amount as prescribed by the National Electricity Regulations, as per section 76 of the National Electricity Act.
The penalty imposed on AGL Hydro and Macquarie Generation demonstrates that registered participants should be wary of misusing the inflexibility and rebidding provisions of the Rules, as it appears that the AER intend to enforce compliance with these provisions. However, we note that that the size of the penalty may still not remove the incentive to bid use the inflexibility arrangements in this way, given the amount of potential gain involved in times of extreme price.
For further information, please contact Paul O'Donnell.
