The Chairman of the Australian Energy Market Commission (AEMC), Dr John Tamblyn, today announced the start of a new review which responds to industry concerns on how better to balance prudential needs between generators and retailers in the National Electricity Market (NEM).

The need for a review on the Role of Hedging Contracts in the Existing National Electricity Market Prudential Framework was identified as a priority by the Commission in the context of its Draft Rule Determination not agreeing with a Rule change proposal on Futures Offset Arrangements (FOA) put forward by a consortium of retailers.

The AEMC today released its Draft Rule Determination (PDF) on that proposal.

The Draft Rule Determination considers that the FOA model as proposed is unlikely to be workable and would not therefore contribute to the achievement of the National Electricity Objective. However, the Commission has concluded that elements of the proposed Rule change have merit in relation to the development of an FOA model with potential to reduce prudential costs for NEM participants.

Attached to today's Draft Rule Determination are Terms of Reference for the new Review. They include a schedule of work which sets the publication date for a Framework and Issues paper (March 2009), a Draft Report (June) and a Final Report to the Ministerial Council on Energy (September). Public Forums will be held in April and July.

If possible, the review will aim to develop a robust model to offset the prudential requirement of a NEM market participant using its futures and other contract positions.

The consultation process undertaken to date for the Rule change proposal has identified some potentially significant risks that would need to be addressed. Some uncertain elements of the proposal would require clarification to make the proposal workable and to ensure that that NEM participants understand their operation.

The review will allow these issues to be considered and resolved where that is feasible. It will also permit the Commission to consult further with stakeholders on the range of complex issues this matter involves.

The review will start immediately while the AEMC continues the statutory process required for the Rule change proposal on Futures Offset Arrangements.

The Rule change proposal's Draft Rule Determination is now open for public consultation with submissions due by 6 March 2009. A Final Rule Determination is expected to be made in April 2009.

For information contact:

AEMC Chairman, John Tamblyn (02) 8296 7800
AEMC Communication Manager, Prue Anderson (02) 8296 7817 or 0404 821 935