Dismissal of the class action against QLD Gencos (Stanwell Corporation and CS Energy) … part 1

As noted late last week, I was away and otherwise focused for much of the past two weeks.

One thing that popped to my attention on Wednesday 4th December 2024 was the article ‘Class action against Queensland’s government-owned electricity generators dismissed’ by Aaron Kelly of the ABC.

1)  But I did not really have much chance to (even start to) look at this until several days later … and all I really have are questions, at this time.

2)  I did not really see much other reporting about this …

(a)  Other than here in the Courier Mail and here in Lawyerly

… but I can’t access either of them, so not sure if of any value (though I did not the title at Lawyerly was ‘Judge boots Queensland energy class action, says ‘profit maximisation’ not unlawful‘)

(b)  But if readers have seen other reporting or (useful!) commentary, it would be appreciated if you could link to it in comments below please?

(A)  What was the genesis of the Class Action?

The parties who initiated the class action (including Piper Alderman and LCM Finance) have put together a website at https://www.qldenergyclassaction.com.au/ with some explanatory material that might be useful for those seeking to understand why such claims were made.

As at this morning (Tuesday 10th December 2024) this is how the website currently looks … but, given the result of the action in the Federal Court, I’m not sure how long this material might continue to remain in place?

What might be of particular use to some readers is the ‘Resources’ page that contains a list of, and links to, other documents that were used to support their case:

At the top of the list of Resources is their 5-page ‘Claim Summary’, which is here:

For those not so familiar with the NEM, useful to highlight that the time-span nominated in the Claim (i.e. 2013 to 2019):

1)  Spans a time when the structure of the QLD GenCos was relatively stable:

(a)  It commences after the 3-into-2 merger (of July 2011) that created the ‘current’ form of Stanwell Corporation and CS Energy;

(b)  But crosses over briefly with the creation of CleanCo in December 2018 (albeit that CleanCo was not fully up and running until sometime later).

2)  But included some of the 24-month long period of the Gillard Government’s ‘Carbon Tax’ (i.e. 1st July 2012 to 30th June 2014).

3)  This all happened before 5-Minute Settlement.

(B)  About the court case?

We looked at this some time ago (earlier in the Court Process) and had a difficult time finding the place to start looking … so, partly for our own future reference, we note that:

• It was heard in the Federal Court of Australia, Queensland Registry
• It was given a docket number QUD19/2021
• It had a title that seemed confusing to me at the start ‘STILLWATER PASTORAL COMPANY PTY LTD ACN 101 400 668 v STANWELL CORPORATION LTD ACN 078 848 674 & ANOR’
• Filed on 20th January 2021

… with the main place to start looking being this root page here:

In terms of linked documents, the two at the top will be of most interest to most readers here, I would think?

I’m not a lawyer (clear caveat … I’m just trying to understand, here, and may well be wrong in my interpretation), but ‘The Order’ seems to pretty clear:

At the bottom of that short 3-page document it notes:

‘The proceeding be dismissed. The matter be adjourned to a date in March 2025 for the determination of costs.’

In contrast to the brevity of the Order, the Judgement goes on in seemingly endless scroll (the Word document that’s linked there is 198 pages long):

(C)  A few questions/observations … including ‘What it all means?’

Given the recency, and the length (and other busyness) I’ve only had a chance to give the Judgement a cursory scan.  I’d like to be able to say ‘when I have time, I’ll look in more detail’ … but I recognise that this is unlikely to happen.

So, for what it’s worth, here’s a brain dump of initial impressions and questions:

(C1)  Approach

My initial understanding (based on 2nd and 3rd hand accounts earlier in the Class Action process) was that the approach was to be not so much looking at NEM Rules but instead looking into broader competition law.

However in the Judgement I saw plenty of reference to the NEM Rules and bidding process (and in particular to ‘short notice rebidding’), so not sure what changed there (if anything)?

(C2)  Distilling down to a few Trading Intervals

In the Judgement it notes:

1)    There were 571,392 DIs during the period from 1 January 2012 to 6 June 2017 (noting that this was the point from which the QLD Government’s ‘don’t make too much profit’ direction was made to the GenCos).

2)  From this there were 351 Affected Trading Intervals (ATIs) identified …

‘The Sample Intervals are a subset of 353 ATIs, identified by Dr Ledgerwood, during which the impugned conduct was said both to have taken place and to have had a quantum effect on the Spot Price in the relevant ATI’

3)  From that selected list of 351 ATIs, the Judgement highlights that 13 were selected (p12/247):

‘In broad terms, the Court was asked to interrogate 13 examples, similar in many respects to the rebid scenario just described, and which are referred to as Affected Trading Intervals #1 – #13 (ATIs). The 13 ATIs (together, the Sample Intervals) were, it seems, chosen by Stillwater’s expert, Dr Shaun Ledgerwood. ’

If time permitted, I’d like to find that list of 351 (and then 13) Trading Intervals to satisfy my own curiosity.

(C3)  A focus on ‘Short Notice Rebidding’

The Judgement also notes (p12/247):

‘Stillwater alleges that, during the Conduct Period, the Respondents took advantage of that market power, for the purpose of deterring or preventing other Generators from engaging in competitive conduct, by their conduct comprised of two elements, which is described as Short-notice Rebidding. The two elements said to comprise Short-notice Rebidding are:

(i) the placing by the Respondents of rebids that repriced, to very high prices, volumes of electricity that formerly had been offered at much lower prices – “economic withholding”; and

(ii) the delaying of placing rebids until just before a bidding “window” closed (gate closure – on average 67 seconds prior to commencement of the next DI), such that other Generators had either no opportunity to respond, or 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.’

… noting that the ‘Gate Closure’ referred to above is what we speak about as Gate Closure #2, which has improved more recently (as a result of AEMO efforts) to be well under 67 seconds.

(C4)  Five (or more?) Experts

It seems that there were at least 5 Experts called on to provide expert assistance during the trial – as follows:

1)  Dr Shaun Ledgerwood, a Principal of the economic consulting firm, The Brattle Group

2)  Mr Euan Morton of Synergies Economic Consulting

3)  Mr Derek Holt, who is a Partner of AlixPartners UK LLP

4)  Dr Ian Rose, who is an Associate Partner at Ernst & Young

… and who was one of the co-founders of Global-Roam Pty Ltd (publisher of WattClarity®) back in 2000, but who has had no involvement with our business for almost 20 years.

5)  Mr Daniel Price, who is co-owner and Managing Director of Frontier Economics Pty Ltd.

If I had time, I’d be particularly scanning the judgement to see what these people said.

(C5)  ‘Profit Maximising’ as a term in the Judgement

Scanning the DOCX of the judgement, there are 64 search results for the word ‘profit’ … 5 of which are used in the context of ‘profit maximising’, as follows:

1)  The first reference (p45/247) was as follows:

‘109     It is significant that the AEMC also recognises the importance of price volatility is a necessary and inherent feature of the NEM. In 2013, in its Potential Generator Market Power in the NEM, Final Rule Determination (26 April 2013) at 24, the AEMC stated:

Indeed, absent of any intentionally anti-competitive conduct by a dominant generator, profit maximising behaviour as manifested by bidding prices above [short run marginal costs (SRMC)] is behaviour that is expected and displayed by a generator with some unhedged capacity in a workably competitive market.’

2)  The second reference (p136 of 247) was as follows:

‘393.  It was also put to Mr Holt in cross-examination that competing Generators, who are assumed to be profit maximising, have “nothing to gain by not responding to the forecast spike in dispatch price and, ultimately, spot price for the trading interval”. Mr Holt disagreed. He explained that it is reasonable to expect that, by the time a withholding bid was made, a rival Generator would have already formed its own view as to the price at which it was willing to dispatch its capacity. As CS Energy submitted, this assessment would be reflected in the rival Generator’s existing bid. In that context, notice of an elevated dispatch price which was higher than earlier forecasts, but still lower than the price at which the rival Generator had bid its capacity, would not necessarily cause the rival Generator to change the price at which it was prepared to offer its output. Rather, the extent to which notice of a future elevated dispatch price would cause a rival Generator to reprice its own capacity would depend upon that Generator’s own commercial and operational considerations, including plant characteristics, fuel availability, and start up and marginal costs. Mr Holt also observed that whether a pre-dispatch price signal would in fact translate into an actual price spike was a matter on which there is “a lot of uncertainty” and in such circumstances, it was possible that a rival Generator might choose to “stand firm” and not react to a forecast elevated dispatch price. Alternatively, Mr Morton suggested, “[t]hey may perceive an opportunity to drive the price still higher again because they know that one of their competitors is not going to exert a competitive constraint that they perceived before that commitment”.

394 Similarly, Mr Price (with whom Dr Rose agreed), said:

Dr Ledgerwood often talks about the so-called first mover advantage. In fact, in many ways it is a first mover disadvantage because they are the ones who are taking the heat on output. And that’s why you get the pile-in. It is 100 per cent certain that you are going to get that price if you get dispatched and so that’s really kind of what they’re looking for as well. Because what it will do, as Dr Ledgerwood has said, it will elevate the whole trading interval price. So even if the dispatch interval price following the pile in reduces they still get the benefit of the elevation trading interval price. So it is much more certain for them as compared to trying to defeat the price which makes no commercial sense.

395 I am unable to accept that the only competitive response from participants in the NEM was to rebid in an attempt to mitigate or abate a price spike.’

3)  The third reference (p204 of 247) was as follows:

‘624 Dr Ledgerwood did not accept that the QNI was “particularly close to binding”. He could not, however, give evidence as to whether CS Energy traders would take the same view. Nor could express a view as to the point at which he would describe the QNI as close to binding. Dr Ledgerwood opined, nevertheless, that it was the rebids which caused the QNI to bind. It was also not in dispute that, in DI4, the QNI started to bind. However, it was not necessarily the rebids which caused the QNI to bind. It was also not in dispute that, in DI4, demand in the QRNEM increased by 72MW. It was put to Dr Ledgerwood in cross-examination that that alone would have been sufficient to close the gap of 34MW on the QNI. Indeed, he accepted such an increase in demand “could cause” the QNI to bind. Further, at the time of CS Energy’s prior rebids of Callide C and Callide B (at 16:42:10), and Gladstone (at 16:58:36), the pre-dispatch information indicated that the unused capacity on the QNI in the DI ending at 17:15 would be between 109MW and 168MW (JtEMER at [536]). There is no basis for rejecting the trader’s explanation at the time of the rebids that they were a response to tightening market conditions and were a rational response for a profit maximising entity.’

4)  The fourth reference (p215 of 247) was as follows:

‘662 Stillwater submitted that, although the rebid reasons were factually accurate, as agreed by both Dr Ledgerwood and Dr Rose (2LedgerwoodR at [1178]; 2RoseR, Table 39), that “does not detract … from the fact that the log clearly records that the rebids were made to achieve a price volume trade-off”. So much can be accepted. It is plain on the face of the reasons that the trader was trying to achieve a price volume trade-off, consistent with Stanwell’s strategy and its incentive as a profit maximising firm. The log does not, however, provide evidence that Stanwell was engaged in Short-notice Rebidding. Stanwell’s rebid was submitted at 15:12:09, approximately two minutes after the trader observed Callide C’s generation at 15:10. The rebid applied across several generating units, albeit only for a short period. There is no evidence of delay.’

5)  The fifth reference (p235 of 247) was as follows:

‘733 As to profitability, and as I have already observed, Dr Ledgerwood did not consider whether Short-notice Rebidding would be profitable absent substantial market power. What evidence there was as to the profitability of CS Energy (and by analogy, Stanwell) was inconsistent with any hypothesis that prices are high relative to costs during the Conduct Period (JtEcER at [350]). In respect of CS Energy, Dr Holt’s evidence was that its return on underlying capital employed was either negative or below 8% (JtEcER at [350]). Similarly, Mr Morton’s evidence was that Stanwell’s actual revenue over the Conduct Period was materially below its assessed efficient cost. He opined (JtEcER at [273]),

[t]he difference between notional spot market revenue and assessed efficient cost was greater still. In combination with the assumption that Stanwell is a profit maximising entity, this provides support for the proposition that Stanwell did not have or use substantial market power over that period. ’

(D)  What comes next …

So for this court case itself, it seems that all that’s left is for the court to award costs in March 2025

… though I’m not aware of whether appeals are possible in this type of court action (and, if so, if this might be chosen as a court of action)?

For us at Global-Roam Pty Ltd (publisher of WattClarity®) we hope to have more time to read through the Judgement in more detail, in order to enhance our learning … and will be looking to learn from lawyers who will be much better placed to explain what it all means in practice.

And for the National Electricity Market … what comes next?