Federal Court of Australia

Australian Energy Regulator v AGL Loy Yang Marketing Pty Ltd [2023] FCA 1299

ORDERS

THE COURT DECLARES THAT:

1.    The Respondent contravened cl 4.9.8(a) of the National Electricity Rules (NER) in relation to 91,990 dispatch instructions given by the Australian Energy Market Operator (AEMO) during the period 23 December 2019 to 22 May 2020 because the Respondent did not operate its equipment to ensure that it could provide contingency frequency control ancillary services (FCAS) which complied with dispatch instructions received from AEMO and so did not comply with the dispatch instructions as required by cl 4.9.8(a) of the NER.

2.    The Respondent contravened cl 4.9.8(d) of the NER in relation to 29,406 trading intervals during the period 23 December 2019 to 22 May 2020 in which the Respondent did not ensure that its ancillary service generating unit was at all times able to comply with the latest market ancillary service offer that it had made to AEMO for the relevant trading interval.

THE COURT ORDERS THAT:

3.    Pursuant to s 44AAG(2)(a) of the Competition and Consumer Act 2010 (Cth), within 28 days of the making of this order, the Respondent pay to the Commonwealth of Australia a pecuniary penalty of $2,800,000 in respect of the contraventions of cls 4.9.8(a) and 4.9.8(d) of the NER referred to in the declarations.

4.    Pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth), within 28 days of the making of this order, the Respondent pay the Applicant’s costs of and incidental to this proceeding, agreed in the amount of $35,000.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

THE COURT DECLARES THAT:

1.    The Respondent contravened cl 4.9.8(a) of the National Electricity Rules (NER) in relation to 142,522 dispatch instructions given by the Australian Energy Market Operator (AEMO) during the period 4 September 2018 to 25 August 2020 because the Respondent did not operate its equipment to ensure that it could provide delayed raise contingency frequency control ancillary services (FCAS) which complied with dispatch instructions received from AEMO and so did not comply with the dispatch instructions as required by cl 4.9.8(a) of the NER.

2.    The Respondent contravened cl 4.9.8(d) of the NER in relation to 34,052 trading intervals during the period 4 September 2018 to 25 August 2020 in which the Respondent did not ensure that its ancillary service generating unit was at all times able to comply with the latest market ancillary service offer that it had made to AEMO for the relevant trading interval.

THE COURT ORDERS THAT:

3.    Pursuant to s 44AAG(2)(a) of the Competition and Consumer Act 2010 (Cth), within 28 days of the making of this order, the Respondent pay to the Commonwealth of Australia a pecuniary penalty of $3,200,000 in respect of the contraventions of cls 4.9.8(a) and 4.9.8(d) of the NER referred to in the declarations.

4.    Pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth), within 28 days of the making of this order, the Respondent pay the Applicant’s costs of and incidental to this proceeding, agreed in the amount of $40,000.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

BUTTON J:

Overview

1    These proceedings were brought by the Australian Energy Regulator (AER) against AGL Loy Yang Marketing Pty Ltd (AGLL) and AGL Macquarie Pty Ltd (AGLM), alleging that each of the respondents contravened provisions of the National Electricity Rules (NER). AGLL and AGLM are wholly-owned subsidiaries of AGL Energy Ltd (AGLE) and are members of the AGLE corporate group (AGL Group). Italicised terms used in these reasons have the same meaning as provided by Ch 10 of the NER.

2    AGLL and AGLM admit that they each contravened provisions of the NER. The parties have filed joint submissions and proposed orders, including declarations and civil penalties in respect of the contraventions.

3    AGLM owns and operates the Bayswater power station, while AGLL is registered as an intermediary on behalf of the AGL Loy Yang Partnership, which owns and operates the Loy Yang A power station. Both the Bayswater power station and Loy Yang A power station operate coal-fired power generating units. During the periods of time relevant to the contraventions the subject of these proceedings, the “frequency influence setting” in two generators at each power station was set to “off”. That was not, in and of itself, a problem. The contraventions arose because, while the frequency influence setting was switched to “off”, each of the respondents bid to provide contingency frequency control ancillary services (FCAS), which bids were accepted by the Australian Energy Market Operator (AEMO), but they were unable to provide all the contingency for which they bid, and received dispatch instructions while that setting was switched to “off”. Consequently, AGLL and AGLM each:

(a)    failed to comply with dispatch instructions given by AEMO; and

(b)    did not ensure that their ancillary services generating units were able to comply with the latest market ancillary service offer that they had made to AEMO for the relevant trading interval.

4    There is some technical complexity to the nature and circumstances of the contravening conduct, but in broad terms, the stability of the electricity network requires the power system operate within a certain frequency band. The operating frequency involves maintaining a certain balance between demand and supply. To ensure that the system operates within that band, AEMO enters into arrangements with power generators to adjust their output. The trading team of AGLE, acting on behalf of AGLL and AGLM, made offers to AEMO to provide such contingency services, which were accepted by AEMO. The making and acceptance of an offer effectively puts the power generator on standby. It should be ready and able to respond to frequency deviations by performing in accordance with the dispatch instruction. However, by virtue of the critical frequency influence setting being set to “off”, AGLL was not in a position to respond to such deviations at all, and AGLM was only partially able to respond. The partial response on the part of AGLM relates to the fact that the Bayswater generators had mechanical governors, which operated such that five out of six kinds of contingency service could be provided even when the frequency influence setting was set to “off”. By contrast, the Loy Yang generators had electronically controlled governors, which operated such that when the frequency influence setting was set to “off”, none of the six kinds of contingency could be provided.

5    The contraventions by AGLL occurred in various periods between 23 December 2019 and 22 May 2020 (the LYA Relevant Period) and the contraventions by AGLM occurred in various periods between 4 September 2018 and 25 August 2020 (the BW Relevant Period) (together referred to as the Relevant Periods). For the Loy Yang generators, the period over which the contravening conduct occurred for one generator (referred to as LYA3) was slightly shorter than the period over which the contraventions occurred for the other relevant generator at Loy Yang (referred to as LYA2): four months, as compared with five months.

6    The contraventions arose from a miscommunication — essentially a lack of communication — between the respondents’ operating teams (which had switched the frequency influence settings to “off”) and the trading team, which was making offers to AEMO. The operating teams’ failure to inform the trading team of the state of the relevant setting was in breach of the respondents’ policies and procedures, but the respondents accepted their policies and procedures were ineffective. Since the discovery of the issue — initially raised by AEMO and then investigated by the respondents — those policies and procedures have been revised, to the satisfaction of the AER. It was also accepted that, had the respondents had in place processes that enabled them to investigate and assess the units’ responses to frequency disturbances, the underlying issue would have been picked up much more quickly, instead of persisting over substantial periods of time, as it did.

7    For the reasons which follow, I am satisfied that the declarations and penalties — $2,800,000 in respect of AGLL and $3,200,000 in respect of AGLM — proposed by the parties are appropriate, and adequately serve the key function of deterring similar conduct. The penalties reflect the duration of the contravening conduct, the financial standing and size of the respondents (and their parent company) and the importance of power generators being in a position to supply contingency in accordance with their offers, which is of vital importance to the maintenance of a secure and stable power network. The penalties also reflect, however, that: the contraventions were inadvertent; the respondents were proactive in investigating the issues and self-reporting to AEMO; the respondents proactively revised their policies and procedures; and the respondents cooperated with the regulators throughout (including by the commencement of these proceedings with agreed facts, and admitting the contraventions).

Background

Power system security and relevant legislative provisions

8    The NER are made under the National Electricity Law (NEL). The NEL is a schedule to the National Electricity (South Australia) Act 1996 (SA) and is applied as law in participating jurisdictions pursuant to the Australian Energy Market Agreement, which provides for national legislation that is implemented in participating states and territories (South Australia is the lead legislator). The AER is established under Pt IIIAA of the Competition and Consumer Act 2010 (Cth) (the CCA).

9    Section 44AAG of the CCA provides for the Court, on the application of the AER, to make orders declaring that a person is in breach of a “uniform energy law that is applied as a law of the Commonwealth” or a “State/Territory energy law” (which includes the NER), and if such a declaration is made, to order that the person pay a civil penalty determined in accordance with the law (amongst other forms of relief).

10    Section 2AA(1)(c) of the NEL defines a civil penalty provision to include a provision of the NER that is prescribed by the National Electricity (South Australia) Regulations (the Regulations) to be a civil penalty provision. Regulation 6(1) states that, for the purposes of s 2AA(1)(c) of the NEL, a provision of the NER listed in Sch 1 of the Regulations is prescribed to be a civil penalty provision. Schedule 1 of the Regulations prescribes that cls 4.9.8(a) and 4.9.8(d) of the NER are each civil penalty provisions.

11    Clause 4.9.8 addresses “General responsibilities of Registered Participants” and, at the relevant time, cls 4.9.8(a) and (d) provided that (emphasis in original):

(a)    A Registered Participant must comply with a dispatch instruction given to it by AEMO unless to do so would, in the Registered Participant’s reasonable opinion, be a hazard to public safety or materially risk damaging equipment.

Note

This clause is classified as a civil penalty provision under the National Electricity (South Australia) Regulations. (See clause 6(1) and Schedule 1 of the National Electricity (South Australia) Regulations.)

…

(d)    A Market Participant which has classified a generating unit or load as an ancillary service generating unit or an ancillary service load, as the case may be, must ensure that the ancillary service generating unit or ancillary service load is at all times able to comply with the latest market ancillary service offer for the relevant trading interval.

Note

This clause is classified as a civil penalty provision under the National Electricity (South Australia) Regulations. (See clause 6(1) and Schedule 1 of the National Electricity (South Australia) Regulations.)

12    The parties’ submissions put these provisions in context, and summarised the maintenance of power system security by AEMO, as well as the respondents’ obligations under the NER. I have adopted that summary in paragraphs 13 to 35 below.

Maintenance of power system security by AEMO

13    AEMO, as market operator, has primary responsibility for maintaining power system security: see s 49 of the NEL. Chapter 4 of the NER provides the framework for achieving and maintaining a secure power system: at cl 4.1.1(a)(1). Consistently with the power system security principles, outlined in cl 4.2.6 of the NER, the power system should be operated within the secure operating state. The power system is in a secure operating state if, in AEMO’s reasonable opinion, the power system is in a satisfactory operating state, or will return to that state following the occurrence of certain events including a credible contingency event in accordance with the power system security standards: NER cl 4.2.4. One element of the power system being in a satisfactory operating state is that the frequency of the power system is within the normal operating frequency band (within 49.85 to 50.15 Hz during the Relevant Periods) except for brief excursions referred to in the NER. Except in the case of a contingency event or a load event (where a wider band is permitted while the event is managed), power system frequency is required to be maintained within the normal operating frequency band at least 99% of the time, and otherwise within the band 49.75 to 50.25 Hz. Following a contingency event or a load event, power system frequency is generally required to return to within the normal operating frequency band within five minutes.

14    All other things being equal, if power generation increases relative to demand, the power system frequency will rise and, if demand for electricity increases relative to supply, the frequency will fall. Therefore, maintaining a continuous equilibrium between demand and supply is important to maintain power system frequency. If the frequency makes large or sustained departures outside the normal operating frequency band, the power system can face significant issues, potentially leading to widespread blackouts.

15    One of the tools used by AEMO to assist in maintaining the frequency of the power system within the operating limits specified in the frequency operating standards is FCAS. AEMO procures FCAS from Market Participants who offer to supply it in the National Energy Market (NEM) so as to ensure that sufficient capability is in place and on standby so that if and when frequency does go outside of the normal operating frequency band, the provision of FCAS ensures that the frequency recovers.

16    FCAS plays and has always played an important role in stabilising the frequency of the power system, including in returning frequency to within its normal operating frequency band in response to unexpected frequency deviations such as those caused by the failure or removal from service of a generating unit or part of the transmission network. Accordingly, it is critical for power system security that FCAS providers can and do respond as expected when frequency deviations occur.

Controlling power system frequency

17    Market ancillary services are defined in cl 3.11.2 of the NER and can be further sub-divided into regulation FCAS and contingency FCAS.

18    Contingency FCAS are enabled to respond to a significant frequency deviation, often occurring as a result of a contingency event as specified in the market ancillary service specification (MASS), such as the loss of a generating unit, a major industrial load or a large transmission element.

19    The following market ancillary services are contingency FCAS: the fast raise service; the fast lower service; the slow raise service; the slow lower service; the delayed raise service; and the delayed lower service: NER cl 3.11.2(a).

20    The fast raise and lower services, the slow raise and lower services and the delayed raise and lower services provide responses over successive and partially overlapping time periods during a significant frequency deviation. The purpose of the service is of particular relevance to the AGLM proceeding, the delayed raise service, is to return system frequency to near 50 Hz between 1 and 5 minutes after a significant drop in frequency: Market Ancillary Service Specification, versions 5.0 and 6.0, s 5.1.

21    AEMO’s power system security responsibilities include arranging the dispatch of ancillary services in accordance with the NER, and utilising ancillary services to maintain or restore the satisfactory operating state of the power system: NER cl 4.3.1(i), (o).

22    AEMO is required to make and publish a MASS which describes each kind of market ancillary service and defines the performance parameters and requirements for each market ancillary service: NER cl 3.11.2(b). During the Relevant Periods, the applicable versions of the MASS were published with effect from 30 July 2017 and 1 July 2020: Market Ancillary Service Specification, versions 5.0, 6.0.

23    AEMO acquires market ancillary services in the spot market in accordance with Ch 3 of the NER: cl 3.11.1(b). Market ancillary services may only be provided by a Market Participant who has been approved by AEMO to classify its generating unit as an ancillary service generating unit (cl 2.2.6) or to classify its load or market load as an ancillary service load (cl 2.3.5).

24    Once registered, an FCAS provider can participate in an FCAS market by submitting a market ancillary service offer to provide that service in a given trading interval (which, during the Relevant Periods, was a 30 minute period that covered six, five minute dispatch intervals). A market ancillary service offer must specify for each type of service the MW quantity of response capability that the FCAS provider is offering to provide, in up to 10 price bands: NER cl 3.8.7A.

25    For each five minute dispatch interval, AEMO’s dispatch engine accepts offers to ensure that a sufficient quantity of each contingency FCAS service is enabled across the NEM to respond, if required, to a frequency disturbance.

26    AEMO may accept those offers for the provision of contingency FCAS by giving dispatch instructions to a Market Participant pursuant to cl 4.9.3A of the NER. Each dispatch instruction must:

(1)    state the relevant generating unit that has been selected for the provision of a market ancillary service;

(2)    state the market ancillary service concerned; and

(3)    nominate the range (that is, the MW quantity) to be enabled: cl 4.9.3A(a).

27    In the terminology of the NER, when a generating unit is given a dispatch instruction to provide contingency FCAS, the unit is enabled to provide the particular service(s) that it has been instructed to provide. When a unit is enabled for a given dispatch interval, it is required to be ready and capable of responding automatically to significant frequency deviations, by injecting or absorbing electricity as set out in the MASS to assist stabilise the frequency of the power system: Ch 10 of the NER.

28    Unlike financial settlements for a generator’s provision of energy into the NEM, an FCAS provider is paid by AEMO for the quantity of FCAS service that it is enabled to provide in each trading interval, rather than for the quantity of FCAS response that its generating unit in fact provides if and when a frequency disturbance occurs.

29    Regulation FCAS are continually used to correct for minor changes in the supply and demand balance. However, contingency FCAS, while always enabled to cover frequency disturbances of the kind normally triggered by a contingency event, are only occasionally used. This is one reason why it is difficult to detect whether the Ancillary Service Provider is complying with its contingency FCAS dispatch instructions.

30    FCAS providers are required to install and maintain monitoring equipment that monitors and records the response of the ancillary service generating unit to changes in the frequency of the power system, so as to be capable of verifying the response that they provide when enabled by AEMO: NER cl 3.11.2(f).

The respondents’ obligations under the NER

31    The respondents are both Registered Participants and Market Participants for the Loy Yang A and Bayswater power stations respectively. AGLM owns and operates the Bayswater power station; while AGLL is registered as an intermediary on behalf of the AGL Loy Yang Partnership, which owns and operates the Loy Yang A power station. For the purposes of the NER, an intermediary is treated as the owner, operator and controller of the relevant generating unit: cl 2.9.3(d).

32    During the LYA Relevant Period, the Loy Yang A power station comprised four coal-fired generating units — in particular, unit 2 (LYA2) and unit 3 (LYA3), with registered generating capacity of 530 MW and 560 MW, respectively.

33    During the BW Relevant Period, the Bayswater power station also comprised four coal-fired generating units — in particular, unit 1 (BW01) and unit 4 (BW04), each of which had registered generating capacity of 660 MW.

34    As Market Participants that had classified their generating units as ancillary services generating units, the respondents were required to ensure that their generating units were at all times able to comply with the latest market ancillary service offer for each relevant trading interval: NER cl 4.9.8(d).

35    The respondents were also required to comply with each dispatch instruction given to them by AEMO for each of their generating units, subject to exclusions not relevant to this proceeding: NER cl 4.9.8(a).

Facts giving rise to the contraventions

36    The parties provided an agreed statement of facts, pursuant to s 191 of the Evidence Act 1995 (Cth). The parties also helpfully summarised the relevant facts in their submissions. As I could not improve upon their summary, it is replicated in paragraphs 37 to 66 below.

AGLL’s contravening conduct

37    Each of the LYA2 and LYA3 generating units:

(1)    produced electricity through steam turbines driven by boilers fueled by brown coal;

(2)    had an electronically controlled governor, which is a component of the unit that regulates the turbine speed by adjusting the unit’s steam valve and therefore the electricity output of the unit; and

(3)    was fitted with a frequency influence setting within the electronic distributed control system (DCS) for the governor, which setting could be switched on and off manually by AGLL’s operations personnel.

38    When switched on, the frequency influence setting facilitated the response of the units to frequency disturbances which response, in broad terms, was to automatically adjust electricity output. This was done by automatically adjusting the generating unit’s MW setpoint for electricity generation and directly operating the steam valves and boiler controls in response to deviations in local frequency.

39    In order for LYA2 and LYA3 to be capable of providing contingency FCAS in accordance with the MASS, it was necessary for the frequency influence setting on each unit to be in the “on” position.

40    As part of LYA2 repairs during a prolonged outage, the frequency influence setting was switched off. This setting remained in the “off” position while the unit was being prepared for return to service in December 2019, and after LYA2 returned to service on 24 December 2019. From 30 January 2020 until 15 February 2020, AGLE’s trading personnel, who had not checked that LYA2 would be capable of providing contingency FCAS, and were not aware that the frequency influence setting was “off”, submitted market ancillary service offers into the NEM for LYA2 (on behalf of AGLL) to provide contingency FCAS. As the frequency influence remained “off”, LYA2 was therefore not capable of providing contingency FCAS in accordance with the MASS. On 15 February 2020, the frequency influence setting was switched back “on”.

41    Between 17 February 2020 and 22 May 2020, the frequency influence setting was again switched off on five further occasions by AGLL’s operations personnel because of concerns about abnormal operation of the plant, including LYA2’s boiler stability, a boiler leak and high vibration with the electric boiler feed pump. However, AGLL’s operations personnel did not inform AGLE’s trading team and the trading team did not check, and so continued to submit market ancillary service offers into the NEM for LYA2 to provide contingency FCAS for trading intervals when the frequency influence setting was “off”.

42    During those periods, LYA2:

(1)    was offered to provide contingency FCAS into the NEM by market ancillary service offers for 18,576 trading intervals (counting separate trading intervals for each of the six separate services) across 77 discrete trading days; and

(2)    received 66,031 dispatch instructions by which it was enabled to provide contingency FCAS (counting separate dispatch instructions for each of the six separate services in each dispatch interval),

in respect of the trading intervals and dispatch intervals when its frequency influence setting was “off”.

43    On 23 December 2019, AGLL’s operations personnel switched off the frequency influence setting on LYA3, in order to prevent the unit from misinterpreting, and incorrectly responding automatically to, an erratic speed wheel signal. However, AGLL’s operations personnel did not inform AGLE’s trading team, who were unaware that the frequency influence setting had been switched “off”, and continued to submit market ancillary service offers for LYA3 to provide contingency FCAS while, the frequency influence setting remained “off”. On 14 February 2020, the frequency influence setting on LYA3 was switched back on, and then switched off again from 17 February until 25 April 2020.

44    During those periods, LYA3:

(1)    was offered to provide contingency FCAS into the NEM, by market ancillary service offers for 10,830 trading intervals (counting separate trading intervals for each of the six separate services) across 41 discrete trading days; and

(2)    received 25,959 dispatch instructions by which it was enabled to provide contingency FCAS (counting separate dispatch instructions for each of the six separate services in each dispatch interval),

in respect of the trading intervals and dispatch intervals when its frequency influence setting was “off”.

45    Although the AGL Group had operational and compliance processes and practices, systems, monitoring and training programs in place, AGLL’s operations personnel did not inform AGLE’s trading personnel when they switched off the frequency influence setting (and therefore disabled the capability of LYA2 and LYA3 to provide contingency FCAS services in accordance with the MASS) and AGLE’s trading team was unaware this occurred and did not check before offering contingency FCAS services to AEMO on behalf of AGLL. This arose from a combination of insufficient practices and inadvertence in the circumstances affecting the operation of the generating units including those identified in paragraphs 41 and 43 above.

46    AGLL reviewed the provision of FCAS by LYA2 and LYA3 in response to a number of specific frequency events, after it noticed that LYA3 had not responded correctly to a frequency disturbance on 28 January 2020, but it concluded that no further review or action was required. For reasons that included the abnormal operation of the plant referred to in paragraph 41 for LYA2 and the erratic speed wheel signal for LYA3, AGLL did not identify that LYA3 had failed to respond correctly because the frequency influence setting had been disabled.

47    In early June 2020, AEMO notified AGLL that it had reviewed high-speed data relating to frequency disturbances that had occurred on 4 and 31 January 2020, through which AEMO had identified that LYA2 and LYA3 had not delivered certain contingency FCAS responses that they had been enabled to supply. After those notifications by AEMO, AGLL identified that the frequency influence setting had been switched off at various times during the LYA Relevant Period, and subsequently self-reported the units’ non-compliance to the AER on 7 August 2020.

48    While LYA2 and/or LYA3 operated with their frequency influence setting “off”, and were enabled to provide contingency FCAS, a total of 26 significant frequency disturbances occurred. Those units were unable to provide contingency FCAS responses to those frequency disturbances, because the frequency influence setting was “off”.

49    During the LYA Relevant Period, AGLL initially received revenues of $689,237.53 (excluding GST) from AEMO for the contingency FCAS that units LYA2 and LYA3 were enabled, but unable, to provide. AEMO recovered the whole of that amount through settlement revisions within 30 weeks after the payments were made to AGLL in accordance with AEMO’s standard settlement revision policy.

50    As a consequence of the conduct summarised in paragraphs 40 to 44 above, AGLL contravened:

(1)    cl 4.9.8(a) of the NER in relation to 91,990 dispatch instructions given by AEMO (66,031 dispatch instructions for LYA2 and 25,959 dispatch instructions for LYA3), as AGLL did not comply with those dispatch instructions, because those units could not provide, and it did not operate its equipment to ensure that those units could provide, the contingency FCAS that they were enabled to provide in accordance with the MASS (in circumstances where AGLL did not hold the reasonable opinion that to comply would be a hazard to public safety or materially risk damaging equipment); and

(2)    cl 4.9.8(d) of the NER in relation to 29,406 trading intervals (18,576 trading intervals for LYA2 and 10,830 trading intervals for LYA3) during the LYA Relevant Period in which AGLL did not ensure that the relevant generating units were at all times able to comply with the latest market ancillary service offer that it had made for each trading interval.

AGLM’s contravening conduct

51    During the BW Relevant Period, each of BW01 and BW04:

(1)    produced electricity through steam turbines driven by boilers fuelled with black coal;

(2)    had a mechanical governor, which is an inherent mechanical component of the turbine system that regulates electrical output and could not be turned off. This feature of the units meant that even when the frequency influence setting was “off”, the units automatically provided some response to changes in local frequency (as described in paragraph 52 below), which assisted to arrest frequency deviations and stabilise network frequency; and

(3)    was fitted with a frequency influence setting within the electronic DCS for the governor, which setting could be switched on and off manually by AGLM’s operations personnel.

52    When switched “on”, the frequency influence setting facilitated the response of the units to frequency disturbances by automatically adjusting the generating unit’s MW setpoint for electricity generation such that the unit, including the steam valves and boiler controls, could operate to respond to deviations in local frequency. When switched “off”, although the units’ response to changes in local frequency was often able to continue for up to several minutes, the extent of the units’ response would tend to diminish over time as, over time, the unit’s control system would return the unit back to its unadjusted setpoint (which typically changes over time as circumstances progress).

53    As a consequence, notwithstanding that the units were capable of delivering, and did deliver some response to frequency disturbances when the frequency influence setting was “off”, it was necessary for the frequency influence setting on each unit to be “on” in order to ensure that the units would provide the delayed raise service in accordance with the MASS in response to any significant frequency deviation. When the frequency influence setting was “off”, the control systems for the Bayswater units could not operate to produce in all cases the appropriate quantity of delayed raise response required by the MASS, being a response proportionate to the relevant scale and duration of the significant frequency deviation.

54    Accordingly, the contraventions committed by AGLM relate only to provision of the delayed raise service, rather than all contingency FCAS services.

55    In 2018, BW01 underwent an outage to fit its new electronic DCS, which replaced its previous analogue control system, and returned to service on 3 September 2018. This was a large power station control system upgrade, with approximately 15,000 individual input/output points impacted. BW04 underwent a similar outage in 2019, and returned to service on 4 December 2019. These were both undertaken as part of a broad works program at the Bayswater power station to improve the life cycle, reliability and performance of the units and included upgrades to multiple aspects of those units beyond the electronic DCS.

56    The switch to turn the frequency influence setting on or off in the new DCS was a new function that had not previously been present on BW01 and BW04 (or on the other units at the Bayswater power station). Under the previous control system, the frequency influence function was always “on”, and could not be manually switched off by an operator.

57    As part of extensive management of change work programs undertaken in order to return BW01 and BW04 to service, the frequency influence function was switched on and successfully tested on both units. However, upon their return to service, the frequency influence setting on both units was in the “off” position.

58    Upon the units’ return to service, AGL’s trading team was not informed that the frequency influence setting was “off” and did not check with the operations personnel. At times during the BW Relevant Period, the trading team submitted market ancillary service offers for BW01 and BW04 to provide the delayed raise service while the frequency influence remained “off”. When the frequency influence was “off” the control systems for the units could not operate to produce in all cases the appropriate quantity of delayed raise response in accordance with the MASS as described in paragraph 51.

59    As a result of a fleet wide investigation that it initiated after having been notified by AEMO on 1 and 4 June 2020 of the inadequate contingency FCAS responses from the Loy Yang A units, AGLM identified on 31 July 2020 that the frequency influence setting had not been switched “on” in units BW01 and BW04. AGLM then switched the frequency influence setting back on. Both BW01 and BW04 featured a mechanical governor which automatically provided some response to changes in local frequency. This, together with the nature of contingency FCAS in which a response is only required when a relevant significant frequency deviation occurs, contributed to the issue not being detected by the AGL Group until July 2020.

60    AGLM inadvertently left the frequency influence setting switch in the “off” position on 19 August 2020 and 21 August 2020 following the conclusion of testing undertaken as part of the introduction of mandatory primary frequency response. This was identified by AGLM and the setting was switched on for both units on 25 August 2020.

61    AGLM notified AEMO and the AER of the units’ non-compliance on 8 and 11 September 2020, respectively, including through the provision of detailed reports.

62    During those periods:

(1)    BW01 was offered to provide the delayed raise service by market ancillary service offers for 31,661 trading intervals across 680 discrete trading days;

(2)    BW01 received 130,418 dispatch instructions by which it was enabled to provide the delayed raise service;

(3)    BW04 was offered to provide the delayed raise service by market ancillary service offers for 2,391 trading intervals across 53 discrete trading days; and

(4)    BW04 received 12,104 dispatch instructions by which it was enabled to provide the delayed raise service,

in respect of the trading intervals and dispatch intervals when their respective frequency influence settings were “off”.

63    Although the AGL Group had operational and compliance processes and practices, systems, monitoring and training programs in place, AGLE’s trading personnel were unaware that the frequency influence switch was “off” for trading intervals referred to in paragraphs 62(1) and 62(3) above and did not check before offering the delayed raise service to AEMO on behalf of AGLM for those periods. This arose from a combination of the insufficiency of those practices and inadvertence in the circumstances identified in paragraphs 55 and 57 above.

64    While BW01 and/or BW04 operated with their frequency influence setting switched “off”, and were enabled to provide the delayed raise service, a total of 261 significant frequency deviations occurred. Although BW01 and BW04 did provide some response to each of those frequency disturbances as explained in paragraphs 51(2) and 52 above, AGLM did not operate its equipment to ensure that those units could provide delayed raise responses to those frequency deviations in accordance with the MASS, because the frequency influence setting was “off”.

65    In respect of the BW Relevant Period, the AGL Group initially received revenues of $1,922,571.83 (excluding GST) from AEMO for the delayed raise service that units BW01 and BW04 were enabled, to provide at times when the frequency influence switch was “off”. After identifying and notifying AEMO of the issue, the AGL Group repaid that amount to AEMO through AEMO’s standard settlement revision policy (and, where that was not possible, through a separate method it arranged with AEMO) as follows:

(1)    AEMO initially recovered $39,440.00 of that amount through settlement revisions within 30 weeks after the payments were made to AGLM on 24 September 2020.

(2)    The AGL Group later voluntarily repaid the remaining $1,883,131.83 (being amounts for periods earlier than the 30-week window for settlement revisions) to AEMO on 11 August 2022.

66    As a consequence of the conduct summarised in paragraphs 55 to 62 above, AGLM contravened:

(1)    cl 4.9.8(a) of the NER in relation to each of the 142,522 dispatch instructions given by AEMO (130,418 dispatch instructions for BW01 and 12,104 dispatch instructions for BW04), as AGLM did not comply with those dispatch instructions, because it did not operate its equipment to ensure that those units could provide the delayed raise service that they were enabled to provide in accordance with the MASS (in circumstances where AGLM did not hold the reasonable opinion that to comply would be a hazard to public safety or materially risk damaging equipment); and

(2)    cl 4.9.8(d) of the NER in relation to each of the 34,052 trading intervals (31,661 trading intervals for BW01 and 2,391 trading intervals for BW04) in which AGLM did not ensure that its generating units were at all times able to comply with the latest market ancillary service offer that it had made for each trading interval.

Principles concerning declaratory relief, civil penalties, and where orders are proposed by agreement

67    Where declaratory relief is sought by consent, the Court retains, and must exercise, its discretion in determining whether to make the declarations sought. The questions posed must be real (not hypothetical), the applicant must have a real interest in raising the question, and there must be a proper contradictor: Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437–8 (Gibbs J); see also Australian Competition and Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 at [12]–[19] (Greenwood, Logan and Yates JJ).

68    Similarly, it is well recognised that it is in the public interest to jointly agree on civil regulatory orders, including penalties. Provided that the Court is “sufficiently persuaded of the accuracy of the parties’ agreement as to facts and consequences, and that the penalty which the parties propose is an appropriate remedy in the circumstances thus revealed”, it is desirable that the Court accept agreed penalty submissions in civil penalty proceedings: Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 (Director, Fair Work) at [46], [58] (French CJ, Kiefel, Bell, Nettle and Gordon JJ); see also NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (NW Frozen Foods) at 291 (Burchett and Kiefel JJ).

69    The primary, if not sole, purpose of a civil penalty is to secure deterrence: Australian Building and Construction Commissioner v Pattinson (2022) 274 CLR 450 (Pattinson) at [14]–[19] (Kiefel CJ, Gageler, Keane, Gordon, Edelman, Steward and Gleeson JJ). Deterrence in this context means both specific and general deterrence: Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 262 CLR 157 (ABCC v CFMEU) at [87] (Keane, Nettle and Gordon JJ); Chief Executive Officer, Australian Transaction Reports and Analysis Centre v Westpac Banking Corporation (2020) 148 ACSR 247; [2020] FCA 1538 (AUSTRAC v Westpac) at [23] (Beach J). Penalties are to be set so that the financial disincentives associated with contraventions are sufficiently high as to encourage compliance with the law: Pattinson at [66].

70    Penalties must be set at such a level as to have sufficient “sting or burden” to achieve “the specific and general deterrent effects that are the raison d’être of its imposition”, without being so high that they are oppressive: ABCC v CFMEU at [116] (Keane, Nettle and Gordon JJ); NW Frozen Foods (1996) 71 FCR 285 at 293 (Burchett and Kiefel JJ). A penalty must not be so low that it can be regarded as merely a “cost of doing business”: Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) (2018) 131 ACSR 585; [2018] FCA 1701 at [120] (Beach J).

71    In Director, Fair Work, their Honours observed that, where consenting parties are legally represented and able to understand and evaluate the desirability of settlement, the Courts should exercise judicial restraint in scrutinising proposed settlements: at [58]–[59] (French CJ, Kiefel, Bell, Nettle and Gordon JJ). In this regard, it is important to give proper regard to the fact that, in cases such as the present, a specialist regulator is involved, and able to offer informed “submissions as to the effect of contravention on the industry and the level of penalty necessary to achieve compliance”: Director, Fair Work at [47]. Of course, that does not mean that there are not circumstances in which Courts will have reservations about the positions adopted by informed regulators.

Imposition of penalties for multiple contraventions

72    Section 67(2) of the NEL provides that, if the conduct of a person contravenes two or more civil penalty provisions, the person is not liable to more than one civil penalty under the NEL in respect of the same conduct. However, as set out by Beach J in Australian Energy Regulator v Snowy Hydro (No 2) [2015] FCA 58 (AER v Snowy Hydro) at [107], successive contraventions occurring by failure to comply with a discrete dispatch instruction for a particular dispatch interval constitute separate contraventions. In that case, Beach J was addressing cl 4.9.8(a) of the NER, but the same reasoning applies to cl 4.9.8(d) for each market ancillary service offer that was made for each relevant service for each 30 minute trading interval. Here, a single penalty is proposed for each of the respondents as the same conduct gave rise to the contraventions of cls 4.9.8(a) and 4.9.8(d) of the NER.

73    In these proceedings, the contravening conduct gave rise to a large number of legally distinct contraventions by each respondent. That is a function of the period of time over which the contraventions occurred, the number of days during those periods of time when the respondents bid for contingency, and the fact that there was a distinct contravention of cl 4.9.8(a) in respect of each distinct five minute dispatch interval, and a distinct contravention of cl 4.9.8(d) in respect of each 30 minute trading interval.

74    While separate contraventions arising from separate acts or omissions ordinarily attract separate penalties, where the acts or omissions are inextricably linked, they may be viewed as a “course of conduct”. While the course of conduct principle avoids double punishment for what is essentially the same contravening conduct, it does not constrain the available maximum penalty or otherwise displace the imposition of a significant penalty: AUSTRAC v Westpac at [64], [67] (Beach J); AER v Snowy Hydro at [118] (Beach J).

75    Finally, the penalty should be assessed to determine that it is “just and appropriate”: Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36 at 53 (Goldberg J); see also Australian Competition and Consumer Commission v Energy Australia Pty Ltd (2014) 234 FCR 343 at 357 (Middleton J). The totality principle requires that “the total penalty for related offences not exceed what is proper for the entire contravening conduct involved taking into account all factors”: Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 at [22] (Beach J) (emphasis in original).

Relevant factors in determining an appropriate penalty

76    Section 64 of the NEL requires the Court to have regard to “all relevant matters” in determining the amount of a civil penalty, and provides a non-exhaustive list of factors to be considered. That list includes the nature and extent of the breach, the nature and extent of any loss or damage suffered as a result of the breach, the circumstances in which the breach took place, whether the wrongdoer has engaged in any prior similar conduct, and whether the wrongdoer had pre-existing compliance programs and was complying with those programs.

77    These factors overlap with, but are not coextensive with, the “French factors” as set out in Trade Practices Commission v CSR Ltd (1991) ATPR 41-076; [1990] FCA 521 at [42], quoted with approval by the High Court in Pattinson at [18] (Kiefel CJ, Gageler, Keane, Gordon, Edelman, Steward and Gleeson JJ):

1.     The nature and extent of the contravening conduct.

2.     The amount of loss or damage caused.

3.     The circumstances in which the conduct took place.

4.     The size of the contravening company.

5.     The degree of power it has, as evidenced by its market share and ease of entry into the market.

6.     The deliberateness of the contravention and the period over which it extended.

7.     Whether the contravention arose out of the conduct of senior management or at a lower level.

8.     Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.

9.     Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention.

The relevance of previous penalty decisions

78    Given the fact-specific nature of the enquiry, previous penalty decisions generally offer only limited, if any, guidance to a Court in determining an appropriate penalty in the case before it. However, a penalty imposed in a case concerning cognate contravening conduct may have some utility in ensuring the consistent application of principle: see Australian Competition and Consumer Commission v Employsure Pty Ltd (No 2) [2021] FCA 1488 at [120] (Griffiths J). To that end, I have had some regard to the matters considered in Australian Energy Regulator v Hornsdale Power Reserve Pty Ltd [2022] FCA 738 (Hornsdale), in which an agreed penalty of $900,000 was approved for non-provisions of FCAS over a period of around four months, where the respondent was declared to have contravened cl 4.9.8(a) in relation to 185,738 dispatch instructions and cl 4.9.8(d) in relation to 32,602 trading intervals. In that case, Besanko J had regard to the following matters (at [79]):

(1)     the contraventions were inadvertent, not deliberate;

(2)     the senior management of the respondent were not involved in the contraventions;

(3)     as soon as the respondent became aware of the deficient contingency response, it took immediate steps to rectify it in combination with Tesla;

(4)     as soon as the respondent became aware of the deficient contingency response, it expeditiously took steps to improve and review its compliance program;

(5)     the respondent has not previously been found by a Court to be in breach of the NER or the NEL in respect of conduct of a similar kind;

(6)     no actual loss or damage was caused by the contraventions, although the respondent made it clear that it accepts the submissions made by the applicant about the structural importance of the services being properly provided;

(7)     the respondent did not profit through the contraventions. It repaid the relevant sum to AEMO upon request; and

(8)     the respondent has fully cooperated with the applicant and AEMO throughout the process of ascertaining and admitting liability for the contraventions.

79    The respondent in Hornsdale was much smaller than AGLL and AGLM. Further, the contraventions in Hornsdale occurred over a shorter period of time, and involved a software update undertaken by third party (cf the involvement of internal personnel in the present contraventions).

Application of principles in the present case

80    It is convenient to start by identifying the maximum available penalties. The maximum penalty for each contravention is $100,000 (s 2 of the NEL). Given the number of distinct contraventions, the maximum penalties would be in the billions of dollars, and, as such, do not constitute a meaningful point of reference by which to assess the appropriate penalties in this case. Rather, in this case, consideration of the relevant factors (many of which overlap) leads me to conclude that the penalties proposed by the parties are appropriate, notwithstanding that they bear no relationship to the statutory maximum penalties.

81    The nature and extent of the breach: the respondents’ contraventions occurred over extended periods of time — over four or five months in respect of AGLL, and two years in respect of AGLM. As submitted by the parties, the contraventions arose not from the frequency influence setting on the respondents’ generators being switched “off”, per se, but rather from the respondents’ trading personnel having bid to provide contingency services for trading intervals in which the frequency influence settings were switched off. There was a lack of communication between the operational and trading personnel.

82    There were numerous occasions on which frequency disturbances occurred that should have triggered a response by the Loy Yang and Bayswater units, pursuant to the dispatch instructions. If the respondents had had in place systems and procedures by which they checked and assessed the units’ response to frequency disturbances, the underlying issues in the present proceedings could have been detected much more quickly, averting subsequent contraventions.

83    Having regard to all of these matters, the contraventions were inadvertent. There was no deliberate or cynical conduct by which bids to provide contingency were submitted in the knowledge that they could not be fulfilled.

84    I accept the parties’ submission that the circumstances giving rise to the contraventions were interrelated and may be characterised as four courses of conduct, one in respect of each of the relevant generators. The relevant course of conduct for each generator was the lack of communication between the operational and trading personnel as to the frequency influence setting for that generator having been switched off.

85    In respect of the Bayswater generators, the extent of the breach was somewhat ameliorated by the units’ ability to provide five out of six kinds of contingency services; it was only the delayed raise services that could not be provided and gave rise to the failure to comply with the relevant dispatch instructions.

86    The AGL Group had processes and procedures in place to promote compliance with the NER. Those processes and procedures included an operational procedure requiring operational personnel to inform trading personnel if they switched off the frequency influence settings. In practice, however, the operational procedure was not followed.

87    The respondents did not identify and correct their units’ non-compliance until AEMO informed AGLL, in early June 2020, of the inadequate responses from LYA2 and LYA3 to frequency disturbances that occurred in January 2020. Following that notification, AGLE consequently initiated a broader fleet-wide review that uncovered the nature and extent of the non-compliance both at Loy Yang and at Bayswater, following which the respondents self-reported to AEMO.

88    The nature and extent of any loss or damage suffered as a result: the respondents’ contraventions did not cause any actual loss or damage to end users. However, the contraventions did result in there being less contingency FCAS available to respond to any significant frequency deviations and so raised the risk that power system security would be compromised in the event of a frequency disturbance. This factor heightens the need for deterrence in respect of the respondents’ conduct. It is, of course, vitally important that power generators in fact be able to provide the contingency to which they commit.

89    The circumstances in which the breach took place: the contraventions arose from a combination of insufficient processes and practices and inadvertence, which resulted in contraventions over periods of almost two years (in respect of AGLM) and four or five months (in respect of AGLL). In each case, the frequency influence setting was switched “off” by the companies’ respective operational staff for legitimate operational reasons, but the operational staff failed to tell the trading team that the setting was switched off, and the trading team did not make enquiries of the operational teams before bidding to provide contingency. While the AGL Group had various compliance processes and procedures in place to promote compliance with the NER (as set out above), those processes and procedures were insufficient to prevent the contravening conduct.

90    Since the respondents became aware of the contravention, the AGL Group has taken steps to improve its compliance and monitoring processes, including by developing protocols for authorisation and notification of AGLE’s trading team of changes to the frequency influence settings for its generators.

91    Whether the respondents had engaged in previous contraventions of a similar nature: the respondents have not previously been found by a court to be in breach of the NER or the NEL for conduct of a similar nature. Other generators within the AGL Group were held to have contravened the NER in relation to power system security in Australian Energy Regulator v AGL HP1 [2022] FCA 737, but those contraventions did not concern the provision of contingency FCAS or other ancillary services.

92    Size and financial position of the contravenor: it is relevant here to consider the size and financial position of the respondents as members of the larger AGL Group, both because AGLE bears some responsibility for its subsidiaries’ conduct, and because the group’s financial position bears upon the respondents’ ability to meet substantial pecuniary penalties and the level of penalty required to have a deterrent effect. In 2019 and 2020, the AGL Group returned profits of $907 million and $1.015 billion, but made a loss of $2.058 billion in 2021. I am satisfied that, having regard to the fact that the two contravenors are part of a large corporate group, substantial penalties are appropriate in this matter. I am also satisfied the respondents have the financial capacity to pay the proposed penalties. The penalties, while not “crushing”, have sufficient “sting” to serve the purposes of general and specific deterrence.

93    Deliberateness of the contraventions: the contraventions were inadvertent. The decision to switch off the frequency influence setting on the Loy Yang A units was deliberate, but the frequency influence setting on the Bayswater units was left “off” inadvertently when the units were returned to service. Additionally, the AGLE trading team was unaware that the frequency influence settings were “off”, and would not have bid into the relevant contingency FCAS markets had they been so aware.

94    The extent of any profit or loss derived as a result of the contravention: while the contravening conduct initially resulted in the respondents receiving substantial payments when their offers to provide contingency services were accepted, they subsequently repaid the sums received and so have not retained any financial benefit.

95    Whether the conduct arose from senior management: no members of senior management were involved in the contraventions.

96    Cooperation with AER and AEMO: after being notified by AEMO of the inadequate responses from LYA2 and LYA3, the respondents conducted a wider review and notified the AER of their non-compliance to the AER. The respondents also cooperated with the AER during its investigation and admitted the alleged contraventions prior to the commencement of these proceedings.

97    Whether a company has a corporate culture conducive to compliance: the parties submitted, and I accept, that the AGL Group “devotes considerable resources to legal compliance”. Following notification that the Loy Yang units had not delivered expected contingency, AGLE conducted a fleet-wide review, which identified resulted in the issue in relation to the Bayswater units being identified. The respondents, as already noted, self-reported to AEMO. Changes were also proactively made — to the satisfaction of the AER — to the companies’ policies and procedures.

Conclusion

98    In my view, having regard to the considerations set out above, the parties’ proposed penalties — $2,800,000 against AGLL and $3,200,000 against AGLM — are appropriate in all the circumstances. It is appropriate that the penalty against AGLM is somewhat higher than the penalty against AGLL. That is because AGLM’s contraventions occurred over a substantially longer period (nearly two years), while noting that AGLM’s contraventions only prevented one form of contingency being provided (cf AGLL’s contraventions, which saw no contingency at all provided). The quantum of these penalties is sufficiently high to serve the ends of general and specific deterrence, recognising the importance of generators ensuring they are able to supply the contingency to which they commit, in ensuring that the Australian community has a reliable energy system. The quantum also reflects the manner in which the respondents (including through their parent company) were proactive in their response, and cooperated fully with the regulators.

99    I will make orders substantially in the form sought by the parties, including an order that the respondents pay the AER’s costs of the proceedings, with a fixed amount of $35,000 to be paid by AGLL and a fixed amount of $40,000 to be paid by AGLM.

Associate:

Dated:    30 October 2023