Contractual Dispute involving Kwinana Power Station and the Wholesale Electricity Market

Electricity Generation and Retail Corporation v EIT Kwinana Partner Pty Ltd [2022] WASCA 3

Context:

To understand this dispute, it is necessary to appreciate features of the wholesale electricity market that operated in Western Australia in 2005 (Market).

The Market operated in accordance with the Wholesale Electricity Market Rules (Market Rules).[1]

In the Market, generators sold their electricity production capacities (slices) either:

1.     Directly to retail customers via bilateral contracts; or

2.     Via auctions in the short-term energy forward market.

For system security, it is critical that the supply of electricity always meets demand.  An entity known as Systems Management (Management) monitored the Market to determine if supply and demand were in balance.[2] If there was imbalance, Management was required to intervene in the Market by increasing supply. Management could do so by using slices that were held in reserve to generate electricity. Management achieved this by entering into contracts with generators to hold slices in reserve in exchange for compensation. The service of a generator holding a slice in reserve for Management to deal with unexpected losses of electricity was defined in the Market Rules as a Spinning Reserve Service (Spinning).

Facts:

The Respondents, which included the NewGen Power Kwinana Partnership and its agent (collectively the IPP), were generators that operated the Kwinana Power Station. In 2005, the IPP entered into an agreement (the TPA) with Western Power Corporation (Western) for the supply of slices. Notably, Western had several roles in the Market, including as a customer and as Management. In that sense, the TPA was both a bilateral contract and a contract for Spinning.  

Under the TPA:

• IPP’s slices were categorised into a group called “FC Slices” or “Original FC Slices”.
• Clause 7.3 required Western to pay Spinning Reserve Capacity Payments to IPP: “Western Power must pay to the IPP a Spinning Reserve Capacity Payment in respect of each FC Slice that is Available for Spinning…”
• Clause 7.1 defined “available for spinning”: “each Original FC Slice will be deemed to be Available for each Trading Period for Western Power to nominate for Spinning Reserve Services (Available for Spinning)…”.

Dispute:

A dispute arose as to whether Western’s obligation to pay IPP under clause 7.3 only arose when Western had nominated slices for Spinning, or whether it was obliged to make those payments in any event.

The appellant Synergy (which was Western’s effective successor after it had disaggregated) submitted that Western was only obliged to pay when a nomination had been made. As Western had not made any nomination, it was not obliged to pay. Synergy’s submission depended on construing clause 7.3 as a payment that Western, in its role as Management, would owe to IPP for Spinning.

IPP contended that nominations were not required, and so clause 7.3 payments were owing. IPP’s submission depended on construing:

• Clause 7.3 as a mechanism through which IPP passed onto Western, in its role as Customer, the costs it had incurred from Spinning; and
• Clause 7.1(j) as a payment obligation that Western (as Management) owed IPP for Spinning.

The trial judge found in favour of IPP that clause 7.3 payments were owed irrespective of nominations, largely based on the ordinary grammatical meaning of clauses 7.1 and 7.3.

Synergy appealed to the Court of Appeal, which unanimously found that clause 7.3 payments were only owed following a nomination.

Principles:

The Court of Appeal recognised that this dispute concerned a matter of contractual interpretation, and in doing so, repeated at [230] the following principles:

1.     Consider the clause’s text, although beware of relying on text that is poorly drafted;

2.     Consider the clause’s context and purpose. What would a reasonable person have understood it to mean?

3.     The instrument must be read as a whole.

Reasoning:

The Court acknowledged that the obvious grammatical meaning of the clauses favoured IPP’s interpretation ([303]), yet also acknowledged that the TPA was bedevilled with poor drafting: [267]-[272].

The Court acknowledged that the TPA must be construed in the context of the Market Rules: [249]. This meant considering how a reasonable businessperson would read the TPA given their knowledge of the typical operation of the Market Rules: [252].

Bearing that in mind, the Court concluded that clause 7 should be construed in light of the fact that Western, in its role as Management, was responsible for contracting with and paying generators for Spinning ([255]-[257]), and that clause 7.3 reflected payment by Management for such a purpose.

The Court relied on the overall text of the TPA to support this interpretation:

1.     Clause 7, read as a whole, could only sensibly refer to a single payment obligation, not several: [291]-[293].

2.     Clause 7 frequently referred to the IPP “providing services”. This suggested that IPP was providing something of value to Western Power (i.e. Spinning) and not “passing on” costs: [308].

3.     Clause 7 used inconsistent definitions of “Spinning”. While under the Market Rules, Spinning meant the holding of slices, in clause 7, it often referred to the dispatch of electricity from slices: [311]. In clause 7.1, “spinning” referred to the dispatch, and not holding, of reserve electricity: [312]. When viewed in this light, the phrase “available for spinning” in clause 7.1 should be interpreted to refer to only those slices that have been dispatched (i.e. nominated): [313].

Conclusion

This case is valuable in that it provides a detailed introduction to the operation of the wholesale electricity market, examples of poor drafting to avoid, and examples of sound contractual interpretation where private agreements interact with the rules of the wholesale electricity market.

[1]              The Market Rules were made by a relevant Minister pursuant to their powers under the Electricity Industry (Wholesale Electricity Market) Regulations 2004 (WA). These regulations were in turn made pursuant to s 122 of the Electricity Industry Act 2004 (WA).

[2]              This function is now exercised by the Australian Energy Markets Operator (AEMO).