Synergy entity’s pricing breached rules: ERA

Vinalco Energy, the Synergy-owned Muja power station operator, could be fined up to $100,000 after it was found to have exercised unlawful power over Western Australia’s electricity market.

As Business News revealed in September, an unusual situation triggered by a failure of Western Power equipment led to undisclosed millions in losses for state-owned generator Vinalco, and at least $10 million in extra charges for electricity retailers.

It has also highlighted flaws in the wholesale electricity market rules.

The situation was so complex the Economic Regulation Authority only handed down its decision on Friday, more than a year after initial investigations commenced and following three requests for extra time.

The ERA found Vinalco had submitted prices on 2,829 occasions over two periods in 2014 totalling 52 days that were higher than reasonable expectations of how much it actually cost Vinalco to generate the electricity.

This behaviour was deemed to have given Vinalco ‘market power’.

According to maximum penalties for contravening these specific wholesale electricity market rules, the breach could attract a maximum penalty of $50,000 for the first contravention and $100,000 for subsequent contraventions.

It is expected the Independent Market Operator, which called for the investigation, will refer the ERA’s findings to the Electricity Review Board, which can impose these civil penalties.

However, it is unclear if the charges will be deemed as one or two contraventions, because the ERA’s findings related to activity on separate occasions, the first during February and March, and the second in June.

Prior to the ERA ruling, Vinalco had argued it could not have been in a position of market power, partly because it did not even want to provide power during those occasions.

It said it had only fed in because it had been required to by System Management, the entity that schedules generators and manages the real-time operation of WA’s power system.

System Management had called on Vinalco’s Muja power station as the best placed stationary energy provider to ensure a reliable flow of power to the Great Southern region, following the failure of a Western Power transformer.

Vinalco claimed the episode cost it several million dollars, in large part due to a complicated set of rules concerning ‘constrained-on’ payments for ‘out-of-merit’ generation.

Vinalco was also critical of what it called the hard-to-calculate and delayed nature of ‘constrained-on’ payments in WA’s electricity market.

“Vinalco’s pricing behaviour is ... aimed to ensure Vinalco avoids incurring losses,” Vinalco general manager Paul Gower wrote in a letter to the IMO.

The IMO had previously flagged the current rules regarding the procurement of ‘out-of-merit’ generation, which is designed to provide temporary relief measured in 30-minute increments, and not for months, could lead to “possible inefficient outcomes”.

In 2014, it said the process could lead to inefficiencies, such as payments to a generator that “may not recover the (actual cost) of that facility” and “market customers (not) easily predict(ing) the costs associated with the constraint payments to market participants”.

It is this last outcome that led to WA electricity participants such as Bluewaters Power, NewGen and Synergy sharing a $10 million-plus bill for the increased costs associated with paying for Muja’s extra generation.

It’s understood participants are upset with the size of the tab, the largest of its kind since the rules for ‘constrained-on’ payments came into effect in 2012, and the financial burden they had to bear from a situation arising because of broken Western Power equipment.

In its finding the ERA acknowledged that, due to the economics of electricity generation and the technical definitions surrounding how much it actually cost Vinalco to generate the electricity, Vinalco would have incurred short-run losses in providing the electricity System Management required.

It noted this was inconsistent with the objective of the wholesale electricity market, and so took this into account when determining whether Vinalco would have offered the same, or higher prices during the periods under investigation if it did not have market power.

Separate to the issue of market rules, it’s understood that an unexpectedly large fuel bill also contributed to Vinalco’s losses.

Muja is believed to have contracted for only enough coal for what it was originally planning to bid into the market; after being called for extra generation, it had to procure emergency supplies at significant expense.

While some have questioned why Vinalco was not privy to extra, less-expensive fuel from its parent company and fellow state-owned entity Synergy, it’s understood Vinalco does not have access to Synergy’s coal supplies and its coal contracts are kept completely separate.

IMO declined to comment, in light of ongoing proceedings.

A Vinalco spokesperson said it would continue to cooperate with the proceedings and defended its actions.

"Vinalco ... will continue to defend its position in light of obvious flaws in the design of the market that may result in the business being penalised for ensuring the people of the Great Southern region could draw on reliable power supplies during network transformer failures," he said. 

"Vinalco's sole intention during the period of the transformer outage was to deliver a reliable supply of electricity. This was achieved successfully and ultimately protected the region from the impact of significant electricity disruptions.

"The ERA considers that Vinalco should have been able to recoup its relevant costs in this situation and the potential for it to incur short-run loses to be inconsistent with the objectives of the wholesale electricity market."