Australian Energy Regulator obtains first civil penalty orders

AER v Snowy Hydro (No 2) [2015] FCA 58

Civil penalties and compliance orders awarded against Snowy Hydro for breach of National Electricity Rules regarding dispatch in the wholesale electricity market.

The penalties and other relief were proposed jointly by the Australian Energy Regulator (“AER”) and Snowy Hydro, following a mediation of the proceeding.

This is the first time that the AER has obtained civil penalty orders from a court under any of the uniform national energy laws. The outcome is also timely for the regulated energy market as a whole, as COAG’s Energy Market Reform Working Group is close to completing a review of the full suite of enforcement regimes under the national energy laws.

The agreed penalty was slightly less than half of the maximum possible penalty of $900,000 (a maximum of $100,000 for each of the 9 contraventions alleged by the AER). The COAG Working Group is expected to consider, among other matters, whether the maximum pecuniary penalties (which have remained constant since 2004) should be increased and/or indexed, and whether further consideration should be given to bringing any other civil penalty provisions into line with the $1,000,000 maximum penalty for breach of the good faith bidding obligation.

The proceeding raised a number of technical issues regarding the operation of hydroelectric and gas-fired generating units under the National Electricity Rules, which had not previously been considered by the courts. These included:

(i) the ambit of the public safety/equipment damage defence;

(ii) how a generator is expected to balance compliance with an immediate dispatch instruction against its ability to meet expected future dispatch targets; and

(iii) the consequences of a generator rebidding its ramp rate down to the minimum allowable ramp rate at the same time as it exceeds its dispatch target (potentially limiting AEMO’s ability to reduce the generator’s target down to equilibrium levels in subsequent dispatch intervals).

On the second of those issues, the agreed facts on which the settlement was based provide clear guidance that a generator is not justified in failing to comply with its present dispatch instruction merely because it anticipates that, by doing so, it might prevent itself from receiving or meeting dispatch targets that it might otherwise expect to receive in future dispatch intervals.

During the proceeding, Snowy Hydro raised (but withdrew, as part of the agreed outcome) a cross-claim that the relevant provision of the National Electricity Rules is void for unreasonableness and uncertainty. That claim was directed to uncertainty as to what margin of error, if any, is allowed to a generator for failing to comply exactly with the target output level specified in a dispatch instruction. Beach J had previously refused Snowy Hydro’s application to hear the cross-claim as a preliminary issue: AER v Snowy Hydro [2014] FCA 1013. Since the approval of the civil penalty orders, Snowy Hydro has indicated that it proposes to submit a rule change proposal to the Australian Energy Market Commission to seek greater clarity on the margin of error issue.

The resolution of this civil penalty proceeding is also notable as the first occasion that the AER has accepted an enforceable undertaking under the power provided by a 2011 amendment to the National Electricity Law. The enforceable undertaking enables the AER to monitor Snowy Hydro’s management and rectification of a legacy technical feature of the Snowy Hydro Scheme generating units, which contributed to one of the 9 contraventions, thereby avoiding the difficulties that might arise if the court were required to supervise Snowy Hydro’s resolution of that engineering issue.

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