On 16 April 2009, the Commission made a Rule determination which did not accept the Rule change proposal Futures Offset Arrangements.  This was because the proposal was unlikely to contribute towards the national electricity objective.   However, the Commission decided to conduct a review to further examine this proposal and other relevant matters.

Background

On 10 January 2008, the Commission received a joint Rule change request from Australian Power & Gas, Infratil Energy Australia and Momentum Energy (Proponents) relating to Futures Offset Arrangements (FOAs).

The Rule change request had essentially two parts:

• it proposed to define and accommodate FOAs within the National Electricity Rules (Rules). An FOA is a commitment entered into by a Sydney Futures Exchange (SFE) Clearing Participant on behalf of a Market Participant to redirect positive cash flows associated with the Market Participant's futures position to NEMMCO (to be held in a Security Deposit Arrangement) to protect against the default of the Market Participant. In return, the Market Participant would only provide bank guarantee support to NEMMCO up to a level equivalent to the futures price at which the FOA was initiated and beyond which cash payment obligations from the SFE Clearing Participant to NEMMCO arise under the FOA; and
• it proposed to modify the Maximum Credit Limit (MCL) calculation methodology. Rather than the MCL methodology using a backward looking price observation as a basis for predicting future pool prices, the MCL methodology would utilise SFE electricity futures prices as the key inputs of the model, representing a forward looking view of future pool price outcomes.

On 14 February 2008, the Commission published a notice under section 95 of the National Electricity Law (NEL) advising of its intention to commence the Rule change process and initial consultation on this Rule proposal.

On 4 March 2008, Australian Power & Gas, accompanied by d-cyphaTrade, made a presentation to the Commission on behalf of all three Proponents.

The Commission invited interested parties to provide submissions on the Rule proposal by 14 March 2008.

The Commission engaged risk consultants Deloitte Touche Tohmatsu (Deloitte) to assess the financial risks to the National Electricity Market (NEM) associated with this Rule change proposal

On 15 May 2008, the Commission published a notice under section 107 of the NEL. This notice extended the period for publication of the draft Rule determination on FOAs to 2 October 2008.

The Commission considered that it was necessary to extend the publication period of the draft Rule determination due to complex issues associated with this Rule change proposal. The complex issues that required the extra time include the need for a detailed analysis of all the financial risks associated with the FOAs. The risk analysis included:

• the timing of payments;
• the early termination of FOAs;
• timing of registration of FOAs;
• payment in the event of default; and
• the obligations of SFE Clearing Participants under the Rules.

The Commission also required extra time to carry out the analysis on the proposed ‘forward-looking' MCL calculations using SFE futures contracts against the existing ‘backward-looking' historical spot price methodology.

Following a stakeholder meeting on 30 September 2008, the Commission considered that it was necessary to further extend the publication period of the draft Rule determination to further consider this Rule change proposal, including consideration of the following issues:

• enforceability of rights and obligations of relevant parties to the proposed FOAs;
• surety of payments under the proposed FOAs; and
• potential interactions between the NEL, the Rules, the Corporations Act and other relevant legislation.

The Commission considered that the issues were complex, and a time extension was necessary to undertake a comprehensive analysis to enable the Commission to have sufficient information to make an appropriate determination on this Rule change proposal.  Therefore, on 2 October 2008, the Commission published a notice under section 107 of the NEL. This notice further extended the period for publication of the draft Rule determination on FOAs to 11 December 2008.

On 11 December 2008, the Commission published a notice under section 107 of the NEL. This notice further extended the period for publication of the draft Rule determination on FOAs to 22 January 2009. The Commission considered the issues raised earlier in this Rule determination process were complex, and a time extension was necessary to further consider these issues.

On 22 January 2009, the Commission gave notice under section 99 of NEL advising of the making of the draft Rule determination on the Rule change proposal Futures Offset Arrangements FOAs.

In making this draft Rule determination, the Commission was mindful of both the benefits and risks associated with the Rule change proposal. Having considered the need to achieve a balance between the risks and the benefits, the Commission determined not to make the Rule proposed by the Proponents. Due to the risks associated with the Rule change proposal, the Commission was not satisfied that the proposed Rule would contribute to the achievement of the national electricity objective (NEO).

Nevertheless, there were elements of the Rule change which have merit, and which warranted further review. In particular:

• the futures price information could be valuable in providing a forwarding looking view to determine an adequate MCL level; and
• a robust FOA model could potentially reduce prudential costs of NEM participants.

To develop a feasible solution to address the identified risks associated with the Rule change proposal (if it is possible), the Commission decided to conduct a review under section 45 of the NEL to explore the possibility of offsetting the prudential requirement level of NEM participants. This review also aims to develop a robust model to offset the prudential requirement of a NEM market participant using its futures and other contract positions.

It is the Commission's intention to consider elements of the Rule change proposal in the review process.

The Commission also anticipated that further issues may be identified as part of the review process, and intends to address them as part of this review.

The terms of reference for this review is provided in Appendix B of the draft Rule determination.

On 5 February 2009, the Commission gave notice under section 101 of the NEL relating to a public hearing on the Rule change proposal FOA. A public hearing was requested, in accordance with section 101 of the NEL, by Australian Power & Gas and d-cyphaTrade following the publication of the draft Rule determination.

The public hearing was held at the Commission office on Thursday 12 February 2009.

On 19 February 2009, the Commission published a report under section 108A of the NEL. This section requires the Commission to publicly report on Rules not made within 12 months of public notification of request.

The Commission did not make a Rule within 12 months of public notification of request because the issues involved were complex, and extra time was required to analyse these issues.

On 16 April 2009 the Commission gave notice under section 102 of the NEL of its final Rule determination. The Commission decided not to accept the Rule change proposal in relation to FOAs. This was consistent with the draft Rule determination on 22 January 2009.  In this final Rule determination, the Commission decided to proceed with the review under section 45 of the NEL.