The intricacies and consequences of generator rebidding strategies in the National Electricity Market (NEM) during the typical ‘hot and sultry’ Queensland summer when many ‘Queenslanders turn on air-conditioners to make the late afternoon heat tolerable’ were examined by Justice Derrington in the Federal Court decision of Stillwater Pastoral Company Pty Ltd v Stanwell Corporation Ltd [2024] FCA 1382.

• The 4 December 2024 decision was published on 9 December 2024 and makes for some interesting reading.
• Paul’s already started the coverage on WattClarity with ‘Dismissal of the class action against QLD Gencos (Stanwell Corporation and CS Energy) Part 1’ yesterday, including links to the relevant Federal Court pages.

The case is noteworthy for a number of reasons, as noted by Dr James Prest [read Dr Prest’s initial analysis on LinkedIn here, and note that he promises more to analysis to come], including that it is Australia’s largest electricity class action to date. The case examines allegations made by Stillwater Pastoral Company as the lead applicant in a class consisting of over 47,000 Queensland electricity consumers (the Applicant) against both Stanwell Corporation and CS Energy (the Respondents). The allegations included that the Respondents engaged in conduct that was contrary to section 46 of the Competition and Consumer Act 2010 (Cth) (CCA).  The Applicant’s allegations focused on a number of rebids submitted during 1 January 2012 to 6 June 2017 (Conduct Period).

To illustrate the conduct that was complained about, a high-level overview of the events of a typical Queensland summer Thursday afternoon (18 February 2016, which Paul has helpfully illustrated here) was set out by the Court:

At 15:00, the 30-minute pre-dispatch price forecast for the Trading Interval (TI) ending at 15:30 was $55.20/MWh, but the next TI ending at 16:00 was forecast to rise significantly to $299.95/MWh.

In response, at 15:26, CS Energy rebid 250MW of generation capacity from a price band of $299.95/MWh to $13,800/MWh.

This move reduced the amount of cheaper electricity available and forced the market’s dispatch system to source supply from higher-priced bands. In the first Dispatch Interval (DI1 being the D1 ending at 15:35) the price spiked to $12,700.30/MWh.

That price was therefore the dispatch price for DI1, a substantial increase from the pre-dispatch forecast of $299.95/MWh.

The allegations were essentially that the NEM is a market, that the Respondents had a substantial degree of power in that market, that they took advantage of the market, and that they engaged in conduct (rebidding) for the purpose of deterring or preventing competing Generators from engaging in competitive conduct in the market.

The complexity of the proceedings

The complexity of the proceedings is evident by the engagement of five expert witnesses who examined the economic theory and principles and structure and operation of the electricity market. There were disagreements on several fronts, including:

• the manner in which the expert for the Applicant determined which trading intervals to examine and their significance,
• what the market is,
• and the consequences of the rebids.

The NER and considerations of rebidding

Generators and other participants are regulated not only by the CCA but also by the National Electricity Law (NEL) and National Electricity Rules (NER) and other instruments.  Justice Derrington discussed how the NER, made under the NEL, operate as legally enforceable rules governing the NEM. These rules evolved from the National Electricity Code (NEC).

Rebidding has been an area of interest to regulators for some time. Prior to the Conduct Period, the ACCC considered proposals to restrict or prohibit certain types of rebidding. Although there were arguments in favour of prohibiting late rebidding to prevent price spikes, these were ultimately not adopted due to concerns that prohibitions would distort the market, reduce efficiency, and potentially increase prices. Instead, the focus fell on a “good faith” obligation for bidding and rebidding and later, more stringent conditions to ensure that rebids were not false or misleading. In its 2002 determination, the ACCC stated that ‘[r]ebidding is a key element of the market design because it allows the market to balance supply and demand efficiently to ensure demand is met by efficiently priced supply.’

Throughout the Conduct Period, the NER permitted rebidding. The Court examined the evolving rules that initially required rebids to be made in “good faith” (i.e., reflecting a genuine intention to honour the bid unless circumstances changed). Amendments effective from July 2016 (stemming from this AEMC Final Determination on 10^th December 2015) went further, prohibiting offers, bids, and rebids that were false or misleading and requiring that any late rebids (those made close to the start of a trading interval) be accompanied by a contemporaneous record explaining the material conditions and circumstances that prompted the change.

Justice Derrington noted that [para 148] a breach of section 46 of the CCA does not depend on breach of the NER however understanding the relevant provision of the NER provided useful regulatory context.

Misuse of market power

Section 46 of the CCA addresses the misuse of market power by corporations (the ACCC published these ‘Guidelines on misuse of market power’ in August 2018). It states that a corporation with a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in that market or any other market in which the corporation or a related body corporate supplies or acquires goods or services.

Section 46 requires a Court to answer four questions [para 165]:

First, what was the relevant market in which the conduct occurred? Secondly, did the alleged contravenor have a substantial degree of market power, in other words, was there an absence of a sufficient level of competition to constrain it from engaging in the conduct? Thirdly, did the alleged contravenor take advantage of that market power? Fourthly, did the alleged contravenor engage in the conduct for one of the prescribed purposes; in this case, for the purpose of deterring or preventing competing Generators from engaging in competitive conduct in the market?

So, below, we’ll examine what Justice Derrington concluded with respect to each of those four questions:

Q1)  What market?

A central issue in the proceedings was identifying the relevant market for the purposes of section 46 of the CCA. Expert witnesses’ views differed on how broadly the relevant market should be defined.

The Applicant’s expert initially suggested that the market could be viewed as separate for each dispatch interval during which Queensland effectively became ‘price separated’ from New South Wales due to binding interconnectors. In contrast, another expert considered that the relevant market was at least as broad as the Queensland Region of NEM (QRNEM) plus the imports from New South Wales. Yet another expert went further, including not only the spot market for wholesale electricity but also the contract markets, behind-the-meter generation, and demand management responses across the entire NEM.

Justice Derrington reviewed well-established legal principles for defining a market. Courts in Australia consider the product, functional, geographic, and temporal dimensions. A market definition should not be artificial or narrow; it should reflect actual and potential substitution possibilities, both in terms of supply (i.e., how easily producers can shift production) and demand (i.e., how buyers might switch sources). Market definition is a purposive exercise aimed at facilitating the correct analysis of competitive constraints and market power.

Applying these principles, Justice Derrington rejected a narrow, transient definition of the market focused solely on brief periods when interconnectors were constrained, causing price separation. Instead, the Court endorsed a more stable and realistic viewpoint. Justice Derrington concluded that the relevant market was the wholesale supply of electricity to the QRNEM, including inflows from outside Queensland. While acknowledging that other features—such as contract markets and behind-the-meter generation—are important factors in understanding overall competitiveness, these considerations did not alter the fundamental definition of the market for this case.

Q2)  Did the Respondents have a substantial degree of market power in the market?

The Applicant’s case started to fall apart when the Court considered whether the Respondents had a substantial degree of market power in the market.

Market power is the ability to profitably raise prices above the competitive level for a meaningful period. Under Australian competition law, as established by cases such as Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; 167 CLR 177, substantial market power must be more than fleeting; it requires a capacity to set prices persistently above costs without rivals taking away customers, or to otherwise act in ways unconstrained by competitive forces.

The Applicant sought to characterise the Respondents as holding such power by pointing to price spikes resulting from short-notice rebids. However, the Court noted that occasional, transient price spikes are not necessarily evidence of substantial market power. In the NEM’s “energy-only” design, short-term price spikes can be a normal feature, allowing recovery of fixed costs and balancing supply and demand.

Experts for the Respondents drew attention to market events that occurred during the Conduct Period including the negative trend in demand and energy from 2010 to 2015, the introduction of the Queensland Gas Electricity Certificate scheme in January 2005, and the Carbon Tax and its effect from 1 July 2012 to 1 July 2014. Also noted was the mothballing (temporary closure) of coal-fired power stations including 680MW from Queensland between 2012 and 2013.

Experts’ Approaches to Assessing Market Power
The Applicant’s expert put forward a definition of market power that, amongst other things, focused on the Respondents’ alleged ability to cause price elevations in brief intervals. The expert also considered the use of proxies such as interconnector constraints, “pivotal supplier” tests, and comparisons of ramp rates to argue that Stanwell and CS Energy could raise prices in a manner contrary to section 46. The Court was not convinced, with Justice Derrington finding: None of these proxies was particularly compelling and often made little sense in the context of the practical operation of the NEM.

In contrast, other expert witnesses emphasised that assessing substantial market power typically involves comparing long-run prices to long-run marginal costs (LRMC). Their analysis indicated that neither Stanwell nor CS Energy consistently exercised power to push prices above competitive levels in a durable way.

Constraints on Alleged Market Power

The Court noted that Stanwell and CS Energy faced multiple competitive and regulatory constraints. There were no significant barriers to entry preventing new capacity from entering the NEM if sustained high prices invited entry. Various operational uncertainties, contract positions, and regulatory oversight also limited the Respondents’ abilities to exploit short-lived market conditions repeatedly or profitably in the long run.

While the Applicant argued that Stanwell and CS Energy’s size and dispatch volumes gave them an advantage in raising prices without risking large losses, the Court found that other Generators frequently engaged in similar rebidding, and in many instances smaller Generators triggered price spikes more often than Stanwell. The scarcity of successful price spikes attributable to Stanwell and CS Energy was a key factor leading the Court to conclude that these episodes did not amount to substantial market power.

The Court concluded that neither Stanwell nor CS Energy had a substantial degree of market power under section 46(1) (or 46(2)) of the CCA during the Conduct Period.

Q3)  Did the Respondents Take Advantage of Substantial Market Power?

Assuming, hypothetically, that Stanwell and CS Energy had such power (which the Court found they did not!), the Applicant contended that the Respondents took advantage of it to engage in short-notice rebidding. The Applicant argued that the Respondents, due to their size, generation capacity, and operational characteristics, had advantages that allowed them to engage in short-notice rebidding that was “materially facilitated” by market power. Stillwater pleaded that the Respondents’ short-notice rebidding was either undertaken “in reliance on” market power or made “materially facilitated” by it.

In examining this question, the Court considered the meaning of “take advantage of market power” under section 46. It noted that “taking advantage” of market power does not require wrongdoing beyond using that market power. Factors listed in section 46(6A), including whether the conduct was materially facilitated by or engaged in reliance on substantial market power, were examined.

The evidence did not show that the Respondents’ conduct depended on substantial market power. Other, smaller Generators were shown to engage in similar short-notice rebidding and sometimes triggered price spikes. The presence of multiple other Generators who could and did engage in like conduct suggested that such rebidding was not uniquely enabled by any substantial market power. The Court observed that if a firm without substantial market power could engage in similar conduct, it cannot be said that the firm with alleged market power was “taking advantage” of that power.

As stated at [741], “it is the antithesis of substantial market power that an entity said to have it is unable to exercise it to its own advantage … as much as its smaller competitors.” Because the same behavior occurred across the market, the Court concluded that the Respondents’ conduct was not reliant on substantial market power.

The Court also noted there was no evidence that this conduct foreclosed or deterred competitors. There were no significant barriers to other Generators participating in the market. Moreover, there was no indication that the Respondents engaged in rebidding without legitimate business reasons. The Court found that striving to maximise returns in an energy-only market, within the rules, was a rational commercial strategy rather than evidence of using market power for a prohibited purpose. As described at [746]-[747], “The evidence does not establish that either Stanwell or CS Energy took advantage of any market power… Even if I had been satisfied that Stanwell and CS Energy had substantial power in the Market and had engaged in Short-notice Rebidding, Stanwell and CS Energy…did not take advantage of their market power.”

Q4)  Was the behaviour for a prescribed purpose?

Because the Court concluded there was no taking advantage of substantial market power, it did not need to answer whether the Respondents had engaged in conduct to deter or prevent competitors from undertaking competitive conduct. Still, it observed that no evidence supported the proposition that short-notice rebidding was aimed at deterring competitive responses or that such conduct had that effect.

Further analysis

This summary of the decision, although lengthy, only touches on selected aspects of the case. It does not fully engage with the expert reports, all of the parties’ submissions, or the Court’s detailed reasoning.

While the Applicant did not succeed, this outcome does not necessarily mean that certain bidding strategies can be pursued without risk. The Court’s findings were based on specific circumstances involving Stanwell and CS Energy during particular periods and the pleadings of the Applicant. Generators and other industry participants would be well advised to seek legal advice on the decision’s relevance to their operations.

Some observers will see the judgment as highlighting potential regulatory gaps, prompting discussions on whether the regulatory framework requires change. It is also noteworthy that in 2011, in separate proceedings before the Federal Court, the Australian Energy Regulator was unsuccessful in establishing that Stanwell had breached electricity market rebidding rules during 2008 ([2011] FCA 991).

Ultimately, however, the Applicant in this case simply failed to demonstrate that the Respondents’ conduct contravened the relevant section of the CCA.

---

About our Guest Author

---