Code Change Panel

Code Change Panel

Report on market operations for Y2K

Delta Electricity proposed a Code change to constrain the market price between $300 and –$50 for the week commencing 30 December. This is the period of highest risk in relation to the Y2K computer bug. Delta’s proposed change is attached at appendix A.

The national electricity market is a key area where the failure of systems would have significant adverse impacts on the community. NEMMCO is developing appropriate strategies to minimise the operational risks. The proposed Code change is aimed at restricting financial risks for both the market itself and end-use customers.

Under all but the most exceptional circumstances, management of financial risk is properly the responsibility of participants. Y2K is, however, unique and unpredictable. There is general recognition that the measures that might otherwise be taken to manage the perceived risks would unnecessarily increase costs, including ultimately to end-use customers. The Panel is satisfied, therefore, that there is a case for some market-wide mechanism to restrict risks, and cap unnecessary and excessive losses, during the most critical period. It has been concerned throughout, however, to ensure that any restriction on normal market operations is as limited as possible. In consulting on the proposed change, therefore, the Panel invited comments in particular on whether:

the arrangement should apply for the seven days proposed by Delta, or for a shorter or longer period. The Panel recommends that it should initially apply for three days but with provision for NEMMCO, with the agreement of NECA, to extend the period for up to a further seven days;

the proposed price ceiling of $300/MWh is appropriate. The Panel is satisfied that it is; and

the price floor should be set at -$50/MWh, as proposed by Delta, or mirroring the proposed price ceiling (ie -$300/MWh) or at zero. The Panel recommends a zero price floor.

Written comments were received from NEMMCO on behalf of its Y2K contingency planning from a commercial perspective working group, Ergon Energy (also on behalf of CitiPower and United Energy), Stanwell Corporation and Pacific Power. Copies of those written comments are at appendix B. The Panel also specifically sought advice from the Code change focus group.

Length of derogation. The Panel is not convinced, including in the light of those comments, that the restriction needs automatically to extend for the full seven days originally proposed by Delta. Any significant problems are likely to emerge, and NEMMCO will be in a position to assess the stability of the market, much more quickly. The Panel therefore proposes that the initial period of restriction should be limited to three days. There should, however, be provision for NEMMCO, with the agreement of NECA, to extend the period for up to a further seven days.

Price ceiling. The Panel agrees that the price ceiling should be $300/MWh. The spot price during the equivalent three day period last year exceeded $300 for only two trading intervals, and then only in one region. Over the equivalent ten day period, the price exceeded this level for only ten intervals, six of those in only a single region and the other four in two regions.

Price floor. Determining the appropriate level for the price floor is complex and has proved contentious. The greater Y2K risk is almost certainly to load rather than to generation with the consequent prospect of excess generation. In those circumstances, if the price floor were allowed to fall too low, there would be a perverse incentive for, and windfall gain to, generators and corresponding losses to retailers and end-use customers as a result of the working-through of contract positions in circumstances where generators were over-contracted. The Panel is satisfied that limiting the risk of these perverse outcomes is appropriate. The Panel made clear that it anticipated, and now understands that it will indeed be the case, that the existing zero price floor in the Code will have been removed before these proposed Y2K arrangements would take effect. NEMMCO has confirmed that it will be able to manage the physical reduction of excess generation with a zero price floor.

Compensation. Provisions for compensation for participants that are despatched below their offer price currently already exist under the arrangements for administered prices. Although not proposed as part of the Delta code change, the Panel considered whether equivalent provisions should be included as part of that change. It is satisfied that they should not.

The Panel recommends that the proposed changes at appendix C should be included in the Code.

Graeme Longbottom Stephen Kelly Gary Maguire

Member Chairman Member

14 July 1999

Appendix A

29 March 1999

Mr S Kelly,

National Electricity Code Administrator

41 Currie Street,

Adelaide, SA 4000

Dear Mr Kelly,

APPLICATION FOR NATIONAL ELECRICITY CODE CHANGE YEAR 2000 (Y2K) COMPLIANCE

This application to change the National Electricity Code is submitted for your consideration. The objective of the amendment is to manage the commercial uncertainty surrounding market arrangements regarding the year 2000 compliance of computer systems.

It is noted that a number of Y2K industry-working groups currently exist and in particular NEMMCO are forming a group to specifically look at commercial arrangements. Delta strongly supports these processes. However, this proposed Code change is seen as a minimum requirement to manage commercial certainty and of course does not prevent alternate more stringent Y2K Code changes coming forward for consideration.

This Code change is required to be processed as soon as possible in order to provide participants with certainty and equity in risk sharing.

Background

It is expected all electricity participants are well advanced with their year 2000 compliance (Y2K) programs. There are many industry based working groups actively progressing matters of reliability, system security and public safety.

However, in addition to the above matters there is the issue of establishing commercial market certainty for this period of time. The risk level faced by all organisations is abnormal and as far as we are aware was never contemplated by the original market designers. These risks are such that:

• no organisation can give absolute assurances that they will not experience problems or that actions by themselves or other parties may result in financial and/or physical impacts on market operations;

• no company has control over third party performance, in particular performance of Network Service Providers and NEMMCO; and

• all companies face a material, force majeure risk (outside the Code definition).

It is the intention, I believe, that NEMMCO will make every effort to manage the physical operation of the market in this critical period. However, that effort itself and/or other participant actions to manage the physical risk may result in financial exposure on the day and contracting behaviour for that period which is unreasonable. If generators will not contract for this period it is unreasonable to expect wholesale customers to bear all the risk.

CODE CHANGE PROPOSAL

The following proposal is put forward for consideration by NECA:

• market to continue to clear normally, however;

• administrative arrangements are put into place to cap price excursions at a ceiling of $300/MWh (spot price) and floor at -$50/MWh (generator dispatch price);

• administered arrangements are to apply from 0001hrs on 30/12/99 to 2400hrs on 6/1/00 EDST; and

• the administered arrangements may be extended by up to a further 7 days at NEMMCO's discretion if defined "material and continuing Y2K problems exist". This may be defined as at least 10 hours of capped prices resulting from actual Y2K events during the initial nominated 7 day period.

I have informally discussed this proposal with a number of generators and retailers with favourable responses. I also believe other stakeholders would find the proposed Code change a sensible way forward.

Some have suggested that the initial application of such administered arrangements should be triggered. While not discounting alternative approaches I believe that defining such a trigger and the obvious uncertainty of its application may not provide the necessary security for individual businesses. (In contrast the extension period is a defined "force majeure event” under the Code, which is appropriate under the circumstances of an actual event).

TIMING OF CODE CHANGE

The outcome of each trading day is a result of contracting activity spanning many months (or years) prior to the day. It is important that rational contracting and pricing behaviour occur between now and the year 2000 as this will lay the foundation for sensible risk sharing across the industry. Therefore, it is essential that this Code change be processed without delay, preferably by July 1999. If this Code change is delayed pressure will build in the contract market leading potentially to inequitable risk sharing and unusual market outcomes.

I suggest that the Code change proposed will provide participants and end users with commercial certainty allowing participants to concentrate on delivering a reliable and secure supply for the year 2000.

Yours faithfully,

Rodney Ward

GM/MARKETING

Market operations for Y2KProposed Code change

3.9.2 Determination of spot prices

Except where Y2K pricing under clause 3.14A applies,NEMMCO has made a declaration that the market is suspended or NEMMCO has invoked an administered price period in accordance with clause 3.14, or under conditions of supply scarcity in accordance with clause 3.9.3, spot prices are to be determined at each regional reference node in accordance with the following procedure: …

3.14AY2K pricing

3.14A.1The period from the commencement of the first trading interval on 31December 1999 until the conclusion of the last trading interval on 2January2000, unless extended under clause 3.14A.4, is a “Y2K pricing period” unless NEMMCO:

(a)Has, prior to the commencement of this period, declared an administered price period under clause 3.14.2(c) which covers trading intervals during this period, in which case those trading intervals that are the subject of the declaration do not form part of the Y2K pricing period ; or

(b)has suspended or suspends the market under clause 3.14.3.

3.14A.2During a Y2K pricing period:

(a)the “Y2K price cap” is $300; and

(b)the “Y2K price floor” is $0.

3.14A.3During a Y2K pricing period:

(a)the provisions of clauses 3.14.2(d) & (e) will apply provided that references to the administered price period will be taken to be references to the Y2K pricing period and references to the administered price cap and administered price floor will be taken to be references to the Y2K price cap and the Y2K price floor as appropriate; and

(b)for the avoidance of doubt, the provisions of clauses 3.14.6 will not apply to any trading interval during a Y2K period.

3.14A.4NEMMCO, with the agreement of NECA, may extend the Y2K pricing period until the conclusion of the last trading interval on 9 January 2000, if it considers the market conditions warrant such an extension.