Chairman of the AEMC, John Tamblyn, today released a final determination approving a proposal by Victorian, South Australian and Tasmanian generators (the Southern Generators) to introduce a new process for managing negative settlement residues in the Snowy Region of the National Electricity Market (NEM). It will take effect from 1 November 2006.

In doing so, the AEMC declined to approve an alternative proposal on the same matter from Snowy Hydro Ltd, he said.

Negative settlement residues are a trading issue managed by the market and the power system operator, NEMMCO. In short they involve a negative impact on financial settlements that happens when power is exported from a high price region to a low price region. (1)

“NEMMCO currently manages the financial risks associated with negative settlement residues by intervening in the electricity market to restrict the flow of power through the Snowy Region. This distorts the market dispatch and pricing processes and can prevent the lowest cost available power generation from reaching consumers at times of high demand,” Dr Tamblyn said.

“Both Rule change proposals would permit more efficient use of the interconnector between the Snowy Region and Victoria, increasing competition between NEM regions and allowing more efficient use of electricity generators.

“The Commission’s analysis indicated that compared to the status quo the two proposals would achieve comparable improvements in the use of the interconnector between the Snowy Region and Victoria and comparable improvements in electricity market competition, efficiency and inter-regional trading risk management.

“The Commission decided in favour of the Southern Generators’ proposal because, contrary to the Snowy Hydro proposal, it did not require the exercise of discretion by NEMMCO or direct intervention in the despatch and pricing processes of the electricity market. Consequently it was more consistent with principles of good regulatory practice.

The Commission concluded, therefore, that the Southern Generators’ proposal would provide greater certainty and predictability for electricity market traders and investors.

The funding of negative settlement residues between Victoria and the Snowy will change so that when power flows north from Victoria to NSW, negative residues on the Victoria-Snowy interconnector will be funded by positive residues on the Snowy-NSW interconnector. When power flows south from NSW to Victoria, negative residues on the Snowy-Victoria interconnector will be funded from positive residues on the NSW-Snowy interconnector.

The Southern Generators’ and Snowy Hydro Rule change proposals are two of a number of proposals and inquiries before the Commission addressing network congestion and regional boundary related matters including in relation to the Snowy Region.

The Commission is aware of a broad consensus among market participants that there is a material problem with the Snowy Region Boundary which requires an enduring long term solution.

The Southern Generators’ and Snowy Hydro proposals involve interim solutions to that problem which would improve the efficiency and performance of the market in the short term.

However, the Commission also has before it related proposals and reviews involving potential longer term solutions to network congestion and regional boundary issues, including some directly related to the Snowy Region. This ongoing work includes:

1. Congestion Management Review
2. MCE Proposal on Reform of Regional Boundaries
3. Snowy Hydro Ltd Proposal on Review of the Snowy regional boundary
4. Macquarie Generation Review of the Snowy Regional boundary

The Commission is adopting an integrated approach in dealing with these matters and has published a Statement of Approach setting out its strategy and timelines for completing that work by March 2007

In formal terms, the AEMC today published a section 102 notice under the National Electricity Law advising of the National Electricity Amendment (Management of negative settlement residues in the Snowy Region) Rule 2006. The Commission also published a section 103 notice advising of the making of the Rule which will commence on 1 November 2006.

Also today the Commission published a section 99 notice under the National Electricity Law advising of the Draft Rule Determination for the proposed National Electricity Amendment (Management of Negative Settlement Residues by Re-orientation) Rule 2006. The Commission has decided not to make a Draft Rule for this proposal. The Commission calls for submissions on the draft determination and invites requests for a hearing.

Note (1): Inter-regional settlement residues

When generators export power to a higher priced region they do not receive the higher price paid by customers in the importing region; they receive the lower price that prevails in their generating region. This causes a surplus of funds to build up, known as inter-regional settlement residues (IRSRs), which are collected by NEMMCO. Units corresponding to shares of IRSRs are auctioned to market participants to help fund any hedging contract payment shortfalls that arise due to inter-regional price differences. On occasion, however, power flows from higher-priced regions to lower-priced regions. In this case, “negative settlement residues” may accrue between two regions. Since, under the current market arrangements, NEMMCO has a limited means for funding large negative residues, NEMMCO takes action to prevent the accumulation of negative settlement residues when they would otherwise arise.

For information contact
AEMC Chairman John Tamblyn (02) 8296 7800
AEMC Public Affairs, Prue Anderson (02) 8296 7800 or 0404 821 935