Generators may no longer be required to bid in good faith; but do not be false or misleading

WHAT YOU NEED TO KNOW

• The Australian Energy Market Commission has issued its proposed draft rule change and draft rule determination to the good faith bidding provisions of the National Electricity Rules.
• The Australian Energy Market Commission proposes to replace the good faith bidding provisions with a prohibition against generators making false or misleading offers, bids or rebids.

WHAT YOU NEED TO DO

• If the rule change is likely to impact on your business, you should consider:
• attending the public forum in Brisbane on 18 May 2015; and
• lodging a submission on the proposed draft rule with the Australian Energy Market Commission by 11 June 2015.

Introduction

The Australian Energy Market Commission (AEMC) has now released its draft rule (Draft Rule) and associated draft rule determination (Draft Rule Determination) on the bidding in good faith rule change proposed by the South Australian Minister for Mineral Resources and Energy.

In summary, the Draft Rule proposes to:

• replace the current requirement that dispatch offers, bids and rebids be made in "good faith" with a prohibition against making offers, bids or rebids that are false, misleading or likely to mislead;
• introduce a requirement for variations to dispatch offers, bids or rebids to be made as soon as practicable; and
• introduce additional reporting requirements for generators.

If implemented, the Draft Rule will have significant implications for generators and National Electricity Market (NEM) participants generally.

Background

The good faith bidding provisions were introduced into the National Electricity Rules (NER) by the Australian Competition and Consumer Commission (ACCC) in 2002 to:

• address aspects of generators' bidding and rebidding strategies that were seen as manipulating wholesale price outcomes in the NEM;
• improve transparency and accuracy of pricing in the NEM; and
• enhance the accountability of NEM participants.

As they currently stand, the good faith bidding provisions provide that an offer, bid or rebid is considered to be made in good faith if, at the time of making the offer, bid or rebid, the generator has a genuine intention to honour that bid if the material conditions and circumstances upon which the bid is based remain unchanged. The Australian Energy Regulator (AER) is responsible for ensuring compliance with the good faith bidding provisions.

A decision handed down by the Federal Court in Australian Energy Regulator v Stanwell Corporation Limited [2011] FCA 991 (Stanwell Case) was the first (and only) judicial consideration of the good faith bidding provisions. In the Stanwell Case, the Federal Court held that to establish an absence of good faith it was necessary for the AER to demonstrate, on the balance of probabilities, that the relevant generator did not have "a genuine intention to honour the bid at the time at which it was made". This placed the burden of proof on the AER to demonstrate that a bid had not been made in good faith (for a summary of the Stanwell Case and judgement please see our previous alert, dated 7 September 2011).

The Rule Change Request

On 17 December 2013, the South Australian Minister for Mineral Resources and Energy submitted a rule change request (Rule Change Request) to the AEMC proposing changes to the good faith bidding provisions under the NER.

The Minister considered the Federal Court’s decision in the Stanwell Case to be inconsistent with the ACCC's original intent behind introducing the good faith bidding provisions. With the onus of proof on the AER, the Minister considered it more likely that generators would be inclined to bid strategically in order to alter price outcomes. This compromised the predictability and transparency of prices in the NEM as well as the accountability of NEM participants.

The Minister suggested amending the NER to:

• clarify what is meant by good faith (and specifically state when an offer, bid or rebid would not be considered to have been made in good faith); and
• place the onus of proof on the generator to demonstrate that an offer, bid or rebid was made in good faith.

AEMC's consultation on the Rule Change Request

On 10 April 2014, the AEMC published the Rule Change Request for public comment. During April, May and June the AEMC undertook an extensive consultation process (including a stakeholder forum) on the proposed changes.

Given the complexity of the issues raised by the Rule Change Request, the AEMC engaged consultants to undertake an analysis in order to quantify the materiality of the issues raised by the Minister. The AEMC determined that the current good faith bidding rules were not adequately addressing the issues of strategic bidding and rebidding and price influencing. However, the AEMC also expressed the view that these issues had only arisen fairly recently and were not widespread across the entire NEM with the majority of cases being confined to Queensland and to some extent South Australia.

On 18 December 2014, the AEMC published an options paper (Options Paper) to facilitate consultation on the Rule Change Request, identifying that there were a number of alternative potential options to deal with the issues sought to be addressed by the Rule Change Request. On 16 April 2015, the AEMC released its preferred Draft Rule and Draft Rule Determination.

Draft Rule and Draft Rule Determination

The key change proposed by the Draft Rule is to remove the obligation, under clause 3.8.22A of the NER, for offers, bids and rebids to be made in "good faith" and replace it with a prohibition against:

A Scheduled Generator, Semi-Scheduled Generator or Market Participant [making] a dispatch offer, dispatch bid or rebid that is false, misleading or likely to mislead.

The Draft Rule also proposes to insert a new "deeming" provision at 3.8.22A(b) which would deem certain offers, bid or rebids to be false or misleading. This provides that:

…a dispatch offer, dispatch bid or rebid will be taken to be false or misleading if: at the time of making such an offer, bid or rebid, a Scheduled Generator, Semi-Scheduled Generator or Market Participant:

1. does not have a genuine intention to honour; and
2. does not have a reasonable basis to represent to other Market Participants, through the pre-dispatch schedules published by AEMO, that it will honour,

that offer, bid or rebid if the material conditions and circumstances upon which the offer, bid or rebid are based remain unchanged until the relevant dispatch interval.

In contrast to the language used under the existing good faith provisions, the above deeming provision in the Draft Rule expressly provides that it does not limit other conduct that may be captured within the general prohibition. Additionally, the deeming provision does not extend to conduct that is "likely to mislead".

The Draft Rule also proposes to amend the NER to provide that the false or misleading character of an offer, bid or rebid may be ascertained from the knowledge, belief, intention, conduct or bidding behaviour (both past and present) of the generator or any other person.

In addition to these key amendments, the Draft Rule also proposes to introduce into the NER:

• a new requirement that a rebid be made "as soon as reasonably practicable" after the generator has formed the intention to make a rebid so that the original offer is not misleading; and
• additional reporting requirements, requiring generators who make rebids during or less than 15 minutes before the commencement of a trading interval, to provide the AER with a report setting out the details of the rebid including the material conditions and circumstances which gave rise to the rebid and the time at which the generator became aware of these events.

Our observations

The Draft Rule proposes to introduce a new framework for bidding and rebidding behaviour in the NEM which effectively adopts some, but not all, of the language and concepts appearing in the misleading and deceptive conduct provisions (and the false and misleading representation provisions) of the Australian Consumer Law (ACL). However, it:

• does this without the precision and supporting machinery of those ACL provisions; and
• applies them within the context of commercial bidding and rebidding of large volumes of wholesale generation capacity in the NEM.

It is therefore not clear how this new framework should be interpreted and applied, or the extent to which principles taken from existing case law relating to the ACL might be relevant.

For example, it is unclear exactly how the proposed clause 3.8.22A(b) deeming provision described above will apply. Under the deeming provision, the onus will still be on the AER to establish that a market participant does not have:

1. a genuine intention to honour a bid or rebid; and
2. a reasonable basis to represent to other market participants (through pre-dispatch schedules) that it will honour the bid or rebid.

In order to establish these two matters the AER will need to obtain either direct evidence of them or, alternatively, evidence of conduct (or other evidence) that will support the drawing of inferences about the market participant's intention, its basis for bidding (and its unreasonableness as a basis for representing the market participant would honour its bid). Only then will the onus effectively shift to the market participant to adduce evidence to rebut such an inference. This can be contrasted with section 4(2) of the ACL which automatically deems a person making a representation about a future matter not to have a reasonable basis for making it, unless that person can adduce evidence to the contrary.

Additionally, where the AER does not seek to rely on the deeming provision but relies on the general prohibition against "a … bid or rebid that is false, misleading or likely to mislead", it is not clear what would amount to a "false" or "misleading" bid or rebid in a market designed to facilitate bidding and rebidding routinely occurring as part of an efficient price discovery process (ie bids are necessarily made on the basis that they may change and are even likely to change in response to competitor bids, as revealed through the pre-dispatch forecast process). This is a quite different context to the specifically itemised "false or misleading representations" about various factual matters set out in section 29 of the ACL.

From a generator's perspective, it is not clear how the generator is expected to demonstrate the reasonable basis for a bid or rebid, particularly in circumstances where the reason for the rebid is that the market is not responding as anticipated at the time of making the initial offer or earlier rebid. In this regard, as indicated above, in determining whether a generator had a reasonable basis for a bid, a court must have regard to market design principles (ie achieving the maximum level of market transparency in the interest of achieving market efficiency, including through the provision of accurate, reliable and timely forecast information). The AEMC itself, in its Options Paper, recognised that the offer and rebidding process engaged in by generators is part of an efficient price discovery process.

There is also considerable discussion by the AEMC in the Draft Rule Determination around the proposed requirement that rebids be made "as soon as reasonably practicable". It is the AEMC's view that this amendment will have the effect of treating a generator's offer as a continuing representation (and therefore make it easier for the AER to establish a contravention). We do not necessarily agree that this will make it easier for the AER to establish a breach. While the obligation to rebid is linked to the change in material circumstances, it is qualified by the words "as soon as reasonably practicable". How these words will be interpreted by the courts, given the dynamic nature of the NEM, is one more aspect of the practical application of the proposed bidding conduct provisions which is uncertain.

What you need to do

If implemented, the Draft Rule will see a wholesale rewrite of the bidding conduct provisions of the NER and will give rise to significant uncertainty in the wholesale market as generators and other NEM participants come to terms with its precise meaning.

If you are likely to be affected, you should consider attending the public forum and making a submission on the Draft Rule and Draft Rule Determination.

The public forum is in Brisbane on 18 May 2015. Submissions on the Draft Rule and Draft Rule Determination are due by 11 June 2015.