The Australian Energy Market Commission (AEMC) has made a final rule, which is a more preferable rule, regarding deviation pricing arrangements in the Short Term Trading Market (STTM) for natural gas. The changes aim to reduce the financial risks of market participation and improve price signals and certainty regarding the costs to trading participants of deviating from their daily gas market schedules.

The final rule largely adopts the changes proposed by the rule change proponent, the Australian Energy Market Operator (AEMO), subject to some exceptions as detailed in the final rule determination.

The final rule amends the National Gas Rules (NGR) by:

• introducing principles and parameters to guide AEMO’s development of “deviation charges” and “deviation payments” in the STTM Procedures;
• clarifying that market parameters relating to the “minimum market price” and “market price cap”, which apply to natural gas traded at a gas hub, do not apply to deviation prices;
• removing the “settlement surplus cap” and, thereby, allowing over-recovered funds to be returned to trading participants based on their share of deviations (not share of withdrawals) at a gas hub; and
• removing the “graduated deviation parameters” due to redundancy under the proposed new deviation pricing arrangements.

The final rule will provide AEMO with the flexibility to undertake its envisaged changes to the deviation pricing framework through future STTM Procedures change and consultation processes.

The final rule will commence on 1 May 2014 to accommodate AEMO's implementation tasks, including Procedures and IT system changes.

Background

Deviations arise when STTM trading participants do not meet commitments made in their daily gas market schedules. Deviations can either be “long” or “short”, depending on whether a trading participant has supplied or withdrawn more or less gas than scheduled through the STTM ex ante gas market process.

If the trading participant’s deviation is short, then AEMO charges that trading participant a “deviation charge”. If the deviation is long, then AEMO pays the trading participant a “deviation payment”.

The exchange of payments between trading participants and AEMO is then used to cover the costs of providing Market Operator Services (MOS), which is used to balance the gas market when deviations arise. “Increase” MOS is provided where more gas has been withdrawn than scheduled. “Decrease” MOS is provided where less gas has been withdrawn than scheduled.

AEMO’s rule change request contained three key amendments to strengthen the causer pays arrangements supporting the deviation pricing framework. These included:

• amending the definition of “minimum market price” (MMP) and “market price cap” (MPC) to clarify that deviation prices do not relate to gas traded at a hub on a gas day;
• amending the definition of “deviation payment” and “deviation charge” to enable trading participants to be charged for deviations that result in a cost to the market, instead of accruing those payments and charges to the monthly settlement process; and
• deleting the “settlement surplus cap” and “graduated deviation parameters” from the NGR. AEMO considered that with the changes envisaged to the deviation pricing arrangements, the graduated deviation parameters would no longer be required.

The AEMC initiated the rule change request on 8 November 2012. At that time, a consultation paper was published to facilitate stakeholder feedback on the proposed rule change request. Also at that time, the AEMC gave notice that it was extending the period of time for the making of a draft rule determination and, if needed, a draft rule, under s. 317 of the National Gas Law. This extension of time was required due to the complex nature of issues raised by the rule change proposal, including issues relating to what matters should be addressed by the NGR and STTM Procedures.

On 28 March 2013, the AEMC published a draft rule determination and draft rule in relation to the rule proposed by AEMO. Submissions to the draft rule determination closed on 9 May 2013.

On 20 June 2013, the AEMC published its final rule determination and final rule. The final rule will commence on 1 May 2014.

Copies of the rule change request, the consultation paper, rule determinations (final and draft) and submissions are available on the AEMC website.