On 10 October 2017 the Australian Energy Market Commission (AEMC) made a final rule that allows for, but does not mandate, the introduction of secondary trading of settlement residue distribution units via the same auction process already facilitated by the Australian Energy Market Operator (AEMO). The final rule also implements a specific risk mitigation measure for seller default risk.

The final rule, which is a more preferable rule, addresses the same issues as Westpac's proposed rule, but takes a different approach with regards to consequences of counterparty default in the secondary market.

The final rule:

• enables auction participants to offer their previously purchased units for sale at subsequent auctions facilitated by AEMO
• requires AEMO to distribute auction proceeds to either the relevant transmission network service provider (TNSP) or auction participant, as the case may be
• requires secondary sellers to provide a margin at the same time as they submit offers to the auction. In case of a default, AEMO must apply that margin to the amounts owing to AEMO by the defaulting party
• requires TNSPs to be responsible for any shortfall in auction proceeds payable to the secondary sellers arising from a buyer default.

Background

On 16 December 2016 the AEMC received a rule change request from Westpac in relation to secondary trading of settlements residue distribution units.

The rule change request was aimed at amending the National Electricity Rules (NER) to enable, but not require, AEMO to provide a platform for secondary trading of units. The proposal included the possibility for AEMO to recover money from TNSPs, if payments fall short because of an auction participant default.

On 11 April 2017 the AEMC published a consultation paper setting out the issues raised by the rule change request. Ten submissions were received on the consultation paper.

On 18 July 2017 the AEMC published a draft determination and a draft rule on the rule change request. Seven submissions were received on the draft determination.