Trading conduct rule
The new trading conduct rule in the Electricity Industry Participation Code 2010 sets out what is appropriate trading conduct behaviour required of generators and ancillary service agents and defines when market power becomes significant. This rule came into force on 30 June 2021.
The trading conduct rule at clause 13.5A of the Electricity Industry Participation Code 2010 sets out the test on trading conduct behaviour. In summary, offers must be consistent with those made where no generator could exercise significant market power (clause 2). Clause 3 defines when market power becomes significant ie, when its exercise would have a net adverse impact on economic efficiency, which includes productive, allocative and dynamic efficiency. This clause also defines the ‘spot market’ and excludes the hedge markets from the requirement set by this rule.
To help participants better understand, and comply with, the trading conduct rule, the Authority has published our approach to monitoring the rule and questions and answers below.
Approach to monitoring the trading conduct rule
This document sets out the Authority’s approach to monitoring the new trading conduct rule and discusses the types of data the Authority will monitor as part of this approach.
An interactive dashboard and regular reports are available on the Monitoring trading conduct webpage. These provide high level indicators of trading conduct and highlight trading periods for further analysis. Updates are also provided on the ongoing work.
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Approach to monitoring the trading conduct rule
Market-Monitoring-new-trading-conduct-rule.pdf (PDF, 473 KB)
Last updated: 01 June 2021
Questions and answers
The Authority has published questions and answers relating to the implementation of the new trading conduct rule which came into force on 30 June 2021.
The rule applies to all generators and ancillary service agents offering energy or reserves in the wholesale electricity spot market.
The definition of pivotal has been removed from the Code. The rule applies to all generators and ancillary service agents offering energy or reserves in the wholesale electricity spot market.
Yes, the rule applies to all energy and reserve offers including final offers and revisions to these offers.
Generators and ancillary service agents should always offer in a way that is consistent with the offer that the generator or ancillary service agent, acting rationally, would have made if no generator or ancillary agent could exercise significant market power at the point of connection to the grid and in the trading period to which the offer relates.
Clearly, the factors will vary with each particular situation. But as a general guide, when you offer (or revise an offer), factors to consider would include whether:
- you could have sustained this offer if you were facing competition in the market; and
- the offer reflects, to a reasonable degree, your costs — including any increases to signal genuine fuel scarcity and the opportunity cost of generation.
Yes, providing that these offers are consistent with the rule. You will need to keep abreast of the prevailing market conditions and you have to be ready to change these offers if these conditions change in a way that would make these offers in breach of the rule.
It would depend on the prevailing circumstances. If you offered at a high price to avoid being dispatched, the Authority may ask you to demonstrate how these offers are consistent with the rule.
The Authority considers that it is unlikely that compliant offers would be priced below cost (ie it is unlikely that a rational offer would be priced so that the marginal revenue is less than the marginal cost). Consistent offering below cost may be a sign that a generator or ancillary service agent is in breach of the trading conduct rule.
However, there may be genuine operational reasons why an offer is priced below cost. For example, a generator might want to ensure that a particular hydroelectric station is dispatched so as to manage river flow. The Authority will take the circumstances into account before forming a view on whether the trading conduct rule has been breached.
The Authority expects that all industry participants will act lawfully when making their offers. Predatory pricing is prohibited by section 36 of the Commerce Act 1986.
Despite the repeal of the safe harbour requirement, generators are still required to ensure that their offering conduct reflects what would occur in a competitive market. This includes both price and volume. If you withhold capacity, the Authority may ask you to demonstrate whether the decision had a reasonable basis and was consistent with the rule.
Acting rationally is to be understood objectively ie, based on the generator behaving in an economically or commercially rational manner.
Clause (1) is emphasising a statement of fact about the electricity spot market and it is intended to provide context to the core test set out in clause (2). It is emphasising the expectation that offers in the electricity spot market will generally be subject to competitive disciplines, but there may be periods (or locations) where one or more suppliers have significant market power.
The definition of these concepts is set out in the Market Development Advisory Group (MDAG)’s Discussion Paper and draws from the definitions adopted by the judgement in relation to Wellington International Airport Ltd and others v Commerce Commission case:
- Productive efficiency - Doing as much as possible with a given set of resources including supplying existing outputs at a lower cost.
- Allocative efficiency - Producing goods and services that customers want in accordance with their willingness to pay for them.
- Dynamic efficiency - Timely response to opportunities (including investment and innovation) or changes in circumstances, and so delivering greater productive and allocative efficiencies over time.
Clause 13.60 in the Code permits participants to treat a group of generating stations as a block dispatch group. Block dispatching allows generators to vary the output of individual stations within a block away from the stations’ dispatch setpoints as long as their aggregate output does not exceed the aggregate dispatch quantity for the block. This allows a generation block to implement instructions within the block to manage hydro resources efficiently.
Being part of a Block Dispatch Group does not change participants’ obligations under the Code including those on trading conduct. Generators must make offers, including within a Block Dispatch Group, that are consistent with the offers the generator would have made if no generator could exercise significant market power at each point of connection within the Block Dispatch Group, in the trading periods covered by the offers.
It is ultimately the Rulings Panel which has responsibility for determining whether the Code has been breached. However, the Authority will form its own view about whether there has been a Code breach in order to carry out its enforcement functions.
It is not possible to set down an overall rule about how the trading conduct rule will apply to every possible situation. However, when the Authority is considering whether an offer is consistent with that rule, it may take into account factors such as:
- whether any generator or ancillary service agent had significant market power at the time that the offer was submitted or revised (including whether that generator or ancillary service agent was able to significantly affect price or market efficiency);
- whether any generator or ancillary service agent was actually exercising significant market power at the time that the offer was submitted or revised;
- supply and demand considerations;
- the offers that would be anticipated in a competitive market; and
- the offers that were made in comparable trading periods.
No. The monitoring guidelines do not necessarily reflect how the trading conduct rule will be enforced by the Authority. The monitoring guidelines have been published to inform the industry about how the Authority is monitoring compliance with the trading conduct rule. The Authority’s monitoring team is not responsible for determining whether or not someone has breached the Code.
If the monitoring team identifies a possible breach of the Code, they will refer it to the Authority’s compliance team. The compliance team will then carry out their own preliminary enquiries to help the Authority to decide whether to open a formal investigation under the Electricity Industry (Enforcement) Regulations 2010. These are separate processes. Just because something has been flagged by the monitoring team does not mean that it is a Code breach, or even that the Authority will open a formal investigation.
Likewise, conduct might be in breach of the trading conduct rule even if it is not identified by the Authority’s monitoring team. There are other ways that possible Code breaches can result in enforcement action. Any person may report a suspected Code breach to the Authority. Industry participants also have their own mandatory reporting obligations. These are not affected by the activities of the monitoring team.
The Electricity Authority (Authority) provides these FAQs to improve participants’ understanding of, and compliance with, their obligations under the trading conduct provisions of the Electricity Industry Participation Code 2010 (Code). Although the Authority has taken care in the preparation of the content of these FAQs, the Authority offers no warranty (expressed or implied) as to the accuracy, completeness, or legality of the content. The Authority is not liable or responsible to any persons for direct or indirect loss or damage that may result from the action or failure to act by any person in reliance on these FAQs.
The publishing of these FAQs does not place an obligation on the Authority to follow any interpretation contained in the FAQs when carrying out its functions under the Electricity Industry Act 2010 (Act) and participants should refer to the Code in full when considering the specific obligation that apply to them.
It should be noted that these FAQs are not exhaustive. They may be updated or changed from time to time. If there is any inconsistency between these FAQs and the Code, the Code takes precedence.
Report alleged breaches of the Code
We remind participants that the Electricity Industry (Enforcement) Regulations 2010 require participants to report alleged breaches of the Code to the Authority. Any person who believes an industry participant has breached the Code must report the alleged breach as soon as possible.
The process for reporting breaches is explained on the How to allege a code breach page.
