Claims of market manipulation against QLD Gencos (Stanwell Corporation and CS Energy) dismissed … part 3

This guest authored article from James Prest is the third in a series of articles pertaining to the QUD19/2021 QLD Class Action.  This article:

• follows a shorter-form article on LinkedIn that Connor James referenced in his earlier review here.  
• is published on WattClarity (with some small edits) following a request by the author (James Prest), and is published in parallel with the publication of ‘Coal-fired generators escape claims of unlawful bidding and market manipulation’ on RenewEconomy.

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On 4 December, the Federal Court dismissed claims that two Queensland-owned companies, Stanwell and CS Energy, had misused their power in the wholesale electricity market through trading strategies calculated to induce power price spikes.

In a complex, drawn-out case that commenced in January 2021, the plaintiffs had argued that the generator companies had engaged in unlawful strategic bidding in the National Electricity Market over the preceding six-year period, to artificially induce higher wholesale prices.

Specifically, the claim alleged ‘misuse of market power’ contrary to section 46, Competition and Consumer Act 2010 (Cth) in relation to bidding in the Queensland Region of the NEM.

However, all of the plaintiffs’ claims of electricity market manipulation in breach of national competition law were rejected. In a written judgement, Justice Derrington observed, ‘engaging in profit-maximising behaviour is not a proscribed purpose.’ [para 759].

The case was led by the Stillwater Pastoral Company on behalf of more than 40,000 Queensland consumers, in Australia’s largest electricity class action to date.

A similar action against AGL was lodged in the Federal Court in Sydney in June 2023.   That claim was:
(a)  Described in the article ‘AGL sued for “abuse of market power” in class action led by pub owners’ on RenewEconomy on 5th July 2023; but
(b)  Dismissed on 15th April 2024, as noted in this ASX & Media Release from AGL Energy.

The Federal Court permits a class action (or ‘representative proceeding’) to be filed by one applicant for a group (class) of people where the applicant and class members have similar claims against a respondent. (Here, Stanwell and CS Energy). Broadly, the applicants claimed economic losses from paying retail electricity prices higher than would otherwise have been the case. Specifically, the group claimed they suffered loss by buying electricity during January 2015-January 2021 at inflated retail prices set by reference to market wholesale costs, which were higher due to strategic bidding behaviour of the power companies.

At stake were potential civil damages of millions of dollars, and reputational risks for the power companies. On paper, the maximum civil penalties for breaches of Part IV of the Competition Act are $50 million (or potentially even higher, 3 times that value of a ‘reasonably attributable’ benefit wrongfully obtained).

As the case was brought privately, it did not involve the Australian Energy Regulator (AER) seeking to enforce competition law or electricity law. In this case the plaintiffs were seeking compensation for economic loss rather than having the AER attempt to persuade the Court to impose a civil fine (or ‘pecuniary penalty’).

In a complex judgement full of technical details over 766 paragraphs and 242 pages, Justice Sarah Derrington gave reasons for rejecting claims that Stanwell and CS had breached competition law through wholesale market bidding practices.

Ten substantive questions were put forward to be resolved, but all were rejected.

The legal prohibition on ‘misuse of market power’ covers several pages of the national competition law. The essence is that a corporation with a substantial degree of power in a market must not take advantage of that power in that market for the purpose of eliminating or substantially damaging a competitor in that market, or similarly preventing entry into that market; or deterring or preventing others from engaging in competitive conduct in that market.

The Court outlined the allegation that each of Stanwell and CS Energy contravened the Competition Act, by certain wholesale market bidding practices that were problematic given the fact that the companies already enjoyed ‘advantages, relative to other suppliers of wholesale electricity in or into the QRNEM, that translated to a substantial degree of market power for each of them.’

Enron and Technical Difficulties

Readers vaguely familiar with California’s electricity supply crisis of 2000-2001 may recall accounts of Enron’s electricity traders devising numerous strategies with colourful names including ‘Fat Boy’, ‘Ricochet’, ‘Bigfoot’, ‘Black Widow’, and ‘Get Shorty’ (see: LA Times and the book The Smartest Guys in the Room).  Some of these trading strategies involved artificially withholding electricity generation, citing reasons including ‘technical difficulties’ in order to push wholesale prices up.

Decades later, there are clearly differences in market structure and rules between California and Australian electricity markets, also decades apart. It is not suggested that CS or Stanwell engaged in the same strategies as Enron. Some of Enron’s trading strategies could never have been attempted here for reasons of geography, market structure and governance.

Still, the general point remains one of simple supply and demand economics. If a generator with sizeable market presence can artificially withhold electricity supply, they may be able to influence wholesale market price upwards, up to the limit of any price cap.   Australia’s NEM has a legislated price cap, the ‘Market Price Cap’ (which is described, with historical context, on this WattClarity Glossary Page).

However, electricity market manipulation cases are complex and very difficult to prove. In 2011, in the Federal Court, the AER failed to establish allegations against Stanwell of breaches in 2008 of electricity market rules regarding ‘rebidding’ ([2011] FCA 991).

The failure of the earlier case may explain why the AER decided to avoid getting involved in this dispute. It is not clear if the AER could have intervened either this class action proceeding (or the one relating to NSW), other than as an amicus curiae or ‘friend of the court’, given that the AER did not suffer economic losses.

Early on, the plaintiff’s law firm Piper Alderman decided to seek the assistance of litigation funders LCM Funding Pty Ltd (Litigation Capital Management). In June 2021, five months after the class action commenced, Stanwell reacted by filing a satellite (or collateral) case to challenge LCM’s involvement, and particularly the way that the class action was structured and financed. Those proceedings sought Court orders restraining LCM Funding and Stillwater from undertaking what it alleged amounted to ‘operating an unregistered management investment scheme’, ‘issuing financial products without an Australian Financial Services Licence’ or ‘aiding and abetting conduct in contravention of the Corporations Act’. Stanwell’s case was dismissed in the first instance by Justice Beech ([2021] FCA 1430). Stanwell then appealed unsuccessfully to the Full Federal Court ([2022] FCAFC 103) where their arguments were unanimously rejected. Justice Lee observed: ‘The characterisation of litigation funding arrangements as managed investment schemes is a case of placing a square peg into a round hole.’(at [7])

After these delaying tactics, also including several other interim applications such as a strike out (or no-case) submission and an application for security for costs (that would have required money to be paid into trust in case that the plaintiffs did not succeed), and, the main case finally moved on to a substantial hearing, more than three years after it was initially filed. It was heard over 34 days in Court 1 of the Federal Court in Brisbane between June and August.

The plaintiffs (led by Stillwater Pastoral) alleged that between Jan 2015-Jan 2021 Stanwell and CSE engaged in trading strategies of ‘short notice rebidding’. It was also alleged that the strategy relied upon their substantial degree of market power.

At the start of her written judgement, Justice Derrington acknowledged that ‘In broad terms, the strategies employed by Stanwell and CS Energy encourage their electricity traders to cause the electricity price to spike when the traders observe certain trends in the course of each Spot Market Trading Day. Those trends include forecast high temperatures, higher than forecast demand, low flow from interstate interconnectors, price volatility, and aggressive bidding by competitor firms.’ [para 1]

Background – Rules – Bids

Trading in the Wholesale Market is governed by Ch.3 of the National Electricity Rules (NER). The provisions govern the spot market, bidding and dispatch. The spot market exists to balance electricity supply and demand. The outcome of trading in five-minute intervals sets a spot price at each regional node. The Rules require generators to submit dispatch bids to AEMO (the Market Operator) for their scheduled or semi-scheduled generating units for each trading day.  At the time of the incidents at issue in the case the market operated on a 30 minute trading interval divided into 5 minute dispatch intervals with the price paid for the trading interval based on the average of the prices at which the market settled in the six dispatch intervals.

In October 2021, Five Minute Settlement commenced, following an earlier rule change by the AEMC.

Rebidding Rules 

At the core of the case was consideration of the so-called ‘Rebidding Rules’ (in s.3.8.22). (Current version) These Rules govern the practice of generators lodging an initial dispatch bid at one level of capacity and price and subsequently replacing it with a revised bid, prior to the deadline closing bids for that trading interval. Subject to other detail in the Rules, it is permitted for generators to submit a rebid to vary their  available capacity, daily energy constraints, dispatch inflexibilities and ramp rates of generating units, scheduled network services and scheduled loads, and to vary what was previously notified in a dispatch offer, a dispatch bid or a previous rebid.

The general practice of rebidding is permitted under the Rules, and this was not disputed by the parties to the litigation. Nevertheless, the plaintiffs alleged breaches of the detail of the Rebidding Rules.

The judgement spends some time setting out the introduction of a ‘good faith’ requirement in the rebidding rules [at 144-154].

More detailed explanation of rebidding rule:

(a)  is is given by the AER in its Rebidding and Technical Parameters Guidelines 2024 .

(b)  and this WattClarity Glossary page about Rebids also provides additional context.

The AER Guidelines state:

‘The NEM is a dynamic market, where relevant participants are able to adjust their bids or rebids to reflect changing events, or in response to changing market conditions. The Rules require that if a dispatch bid or previous rebid is amended through a rebid, a brief, verifiable and specific reason must be provided to the Australian Energy Market Operator (AEMO). The reason provided will be reviewed by the AER when assessing compliance.’ 

A brief technical explanation for allowing rebidding is set out:

‘Relevant participants can also limit, amend or rebid on the basis of the physical or technical capabilities of their plant (technical parameters). The ability to rebid in this way is necessary to ensure the plant is operated safely.’

The Rules applying at that time

The case involved consideration of the Electricity Rules that applied at the time of the alleged misconduct (between January 2015-January 2021). Given the frequency with which the Rules are amended, this is no easy task.

With wry understatement, Her Honour observed ‘Many versions of the NER were in force during the Conduct Period’. (There were 45 versions of the rules in force, in Versions 47 to 92).

At the time of writing, Version 221 is the current version of the Rules. (Tragics wishing to compare the current rules with the old can seek out the Historical Versions).

Short-notice rebidding

At the core of the case was whether Stanwell and CS had a strategy of replacing their previous bids at the last minute with the expectation or intention that other market participants would be unable or unlikely to respond competitively, in a practice known as ‘short-notice Rebidding’.

As the Court described it, this has two elements, firstly ‘the placing … of rebids that repriced, to very high prices, volumes of electricity that formerly had been offered at much lower prices – “economic withholding”; and [secondly] ‘the delaying of placing rebids until just before a bidding “window” closed (gate closure), such that other Generators had …insufficient opportunity to adjust their own generation rates and rebids in such a way as would have prevented the Respondents from achieving very substantial net revenue gains from their rebidding conduct.’ [Para 5]

Amendments had inserted a requirement that generators and market participants must not make a bids or rebid that is false, misleading or likely to mislead. {clause 3.8.22A } Such bids or rebids include those that a generator does not have a genuine intention to honour; or does not have a reasonable basis to make.

The Plaintiffs tendered internal strategy documents and PowerPoint presentations from CS and Stanwell in an attempt to prove their case about breaches in particular trading intervals. Their amended claim alleged that ‘Having earlier submitted bids for a TI, Stanwell or CSE then submitted between approximately one minute and 15 minutes before the start of the Targeted Dispatch Interval (TDl), a Short-notice Rebid that shifted capacity from lower price bands to higher price bands (withheld capacity) with the effect of reducing generation capacity offered in one or more price bands that were below the resulting Dispatch Price.’

The Court acknowledged that ‘The documents demonstrate that the strategies developed by Stanwell and CS Energy were directed at attempting to make profit in the summer months, when conditions were ripe to do so: that is, when there was: high demand; price volatility; extreme temperature events forecast; competitor plant outages; interconnector binding and/or other transmission constraints. As has been seen, each of the Sample [trading] Intervals manifest most, if not all, of these characteristics.’ [para 706]

 

Experts in Hot Tubs

The Court was assisted in answering the questions by five experts. The plaintiffs engaged Dr Shaun Ledgerwood, Principal of the Brattle Group, Washington DC, who produced four reports for the court. Stanwell engaged Mr. Euan Morton of Synergies Economic Consulting, and Mr. Derek Holt of AlixPartners UK. Other experts were Dr Ian Rose (Ernst & Young) and Daniel Price of Frontier Economics, engaged by CS Energy.

The experts gave evidence in two ‘hot tubs’, (a court practice where several experts give evidence concurrently) after preparation of joint reports in two expert ‘conclaves’. The first conclave focused on economic theory and principles. The second covered the structure and operation of the NEM as applied to the contentious issues (e.g. rebidding).

The judgement of Justice Derrington expresses some preference for the evidence of four experts engaged by the power companies to that of Dr Ledgerwood engaged by the plaintiffs. Whilst noting his expertise in relation to competition in power markets in the USA, the Court noted ‘Dr Ledgerwood conceded that, prior to these proceedings, he had had no experience with the operational aspects of the NEM. Despite his obvious diligence in attempting to get across the minutiae of this extremely complex market, he was at a significant disadvantage as compared with Dr Rose and Mr Price, both of whom had been intimately involved with the NEM since its creation.’ [para 34].

At one point the judgement recounts the evidence of Danny Price, ‘when asked about the difference between his opinions and those of Dr Ledgerwood who stated: “It’s not a dispute between me and Dr Ledgerwood. It’s a dispute between the whole National Electricity Market design and the agencies and governments whose market it is and Dr Ledgerwood. All I’m doing is reflecting the design of the market as it has been operating for 30 years. The market Dr Ledgerwood is talking about is not ours.”’ [para 35]

 

What did you do on New Years Eve, Eight Years Ago?

Some of the forensic examination of the trading intervals involved revisiting trading bids made previously, with screenshots and trading logs. Stanwell called two of its traders, Mr Adam Branson and Mr Andrew Jenkins, to give evidence. One notable paragraph describes Mr Jenkin’s evidence that he had no recollection of making a particular rebid. Justice Derrington observed ‘That is not surprising – it was on News Years’ Eve almost eight years ago.’ [para 679].

Other interesting parts of the judgement refer to CS Energy and Stanwell’s internal training manuals for new traders. Both manuals discuss of compliance with the ‘good faith’ rule and obligations to document reasons for rebids. Elsewhere the Court dismisses the probative value of a transcript of ‘a recording of a telephone conversation, apparently between two unidentified people, in which one was at pains to emphasise that the conversation not be recorded.’ [para 473]. Justice Derrington concluded this did not assist the Stillwater’s case (for electricity consumers) as ‘no evidence was adduced that the conversation was preceded by any suggestion that either person was contemplating breaching the NER, let alone proposing to engage in Short-notice Rebidding.’ [473]

Eventually, after extensive review of trading logs and other detailed data about particular trading intervals, the allegations of short notice rebidding were rejected by the Court.

 

Was Market Power Exercised?  

Even if allegations of short notice rebidding had been established, the court had to consider whether Stanwell and/or CS Energy took advantage of market power.

The applicants alleged that Stanwell and CS engaged in Short-notice Rebidding in reliance on trading strategy with the purpose of deterring or preventing other market participants from engaging in competitive conduct. Thirteen examples of alleged Short-notice Rebidding were advanced in support of the claim.

The Court ruled that it was not established that bidding practices had been conducted for the purpose of deterring or preventing others from competing in the market.

In brief, the Court held – ‘The strategy is not established’.

Justice Derrington observed [at para 705] ‘There is no dispute that Stanwell and CS Energy are for-profit entities which, as economically rational actors, seek to be profit-maximising.’

Her Honour continued [706] ‘The documents demonstrate that the strategies developed by Stanwell and CS Energy were directed at attempting to make profit in the summer months, when conditions were ripe to do so: that is, when there was: high demand; price volatility; extreme temperature events forecast; competitor plant outages; interconnector binding and/or other transmission constraints. As has been seen, each of the Sample Intervals manifest most, if not all, of these characteristics.’ At [707] Her Honour concluded ‘There was no evidence capable of supporting an inference that Stanwell and CS Energy deliberately delayed making rebids in the manner pleaded by Stillwater.’

The judgement continues: ‘The counterargument advanced by the plaintiffs (Stillwater), was that was not really surprising. It submitted that, given the penalties under the NER for contraventions of the rebidding rules, “more explicit descriptions of the Respondents’ tactics are unlikely to be reduced to writing”. [Para 707]

Stillwater pleaded that, because of various “advantages” held by the Respondents (number of generating units, low production costs coupled with generation capacity, ramp rate advantages, status as major suppliers into the NEM), they had either greater ability or incentive, or otherwise less risk, to engage in Short-notice Rebidding. It pleaded that the Short-notice Rebidding was “materially facilitated” by or otherwise undertaken “in reliance on” market power.

The Court dismissed the claims as follows ‘I readily accept that Stanwell and CS Energy traders “hoped” that they would be able to cause price spikes over the summer period in accordance with their respective strategies, in order to improve price-volume trade-offs and increase contract prices. That was their purpose in engaging in “late” rebidding. But a hope is not the same as an intention or an expectation. Still less does it equate with a purpose of making it “difficult or impossible” for other Generators to compete in the NEM. Engaging in profit-maximising behaviour is not a proscribed purpose.’ [759]

 

They’re All Doing it

Part of the difficulty for the plaintiffs arose from the apparent ubiquity of Short Notice Rebidding practices – as a trading strategy not confined to Stanwell and CS Energy. The judgment notes that ‘Similar conduct was engaged in by almost every other Generator. The evidence showed that, of the eleven Generators that competed against Stanwell and CS Energy (including one another), nine engaged in high-priced rebidding causing price spikes.’ [738]

The expert evidence showed that the competitors were also active practitioners of short notice rebidding. The judgment notes that ‘Mr Morton observed that any Short-notice Rebidding was met with a swift and effective competitive response by Stanwell’s competitors. This meant, he opined, “that Stanwell was unable to sustain high prices for sustained periods”. The ability of Stanwell to engage in Short-notice Rebidding was, therefore, unrelated to substantial market power.

From this and other evidence, the Court concluded that Stanwell and CS had not prevented other firms from participating in the market. Justice Derrington observed [742] at “[t]he pervasiveness of other Generators’ engagement in the impugned conduct also supports the proposition that the Respondents’ substantial market power did not foreclose firms from the relevant market.’

 

Implications

What are the Implications?  Will the decision lead to calls to reform the electricity rules or national competition law?

A key policy question going forward is whether rebidding is to be more restricted, and in what circumstances.

This issue has been considered at some length on previous occasions. For example, in 2018, former Energy Minister Josh Frydenberg requested AEMC to consider claims made in a Grattan Institute report on ‘gaming’ practices in the wholesale electricity market. In 2018, the AEMC conducted an Assessment of rebidding in the national electricity market. Its analysis held that ‘rebidding is contributing to the delivery of efficient market outcomes but can be a problem where there is a lack of competition between generators.’

 

Where to from here?

In terms of the litigation, further questions remain about whether the plaintiffs will appeal the ruling, and about who will pay costs for this lengthy and complex litigation involving 62 separate pre-trial mentions, interim and administrative hearings prior to the final hearing which ran over 34 separate days with 15 lawyers including 4 KCs and 1 SC.

Legal details aside, a key question is whether this case will be considered in the recently launched Review of the NEM.

(a)  On 26^th November, Energy Minister Chris Bowen’s announced the appointment of an independent panel of experts for a ‘Review of Settings in the NEM’.

(b)  On WattClarity it’s been given the name the ‘Nelson Review’.

In particular, the Review has asked for public submissions.

It will be interesting to see whether the review members see Terms of Reference to be sufficiently broad to justify revisiting the current rebidding rules to ask whether are fit for purpose, or whether they represent (what some see as) an opportunity to rort the market at the expense of electricity consumers. The Review is due to report sometime in late 2025.

 

 

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