1. Wholesale Electricity Market Compliance Update 14 October 2014

2. What this session will cover Our team – who we are and why we’re here Our approach – what we do and how we do it Investigation overview – what we’ve seen (2012 to 2014) Targeted compliance testing – what’s next (2015)

3. Who we are Our team Kylie O’Keeffe – Group Manager Ben Williams – Team Leader Graham Miller – Senior Lawyer Jake Flynn – Analyst Alex Penter – Graduate Analyst (on rotation) Anne-Marie Foo – Graduate Analyst (on rotation) Evolution of team Removal of automatic penalties – UDAP and DDAP $7.5 million (approx) in automatic penalties for the period 1 July 2011 to 30 June 2012 Increase in compliance team since introduction of the Balancing and Load Following Ancillary Services Markets

4. What we do Overview IMO’s core functions and powers are set out in:  Electricity Industry (Wholesale Electricity Market) Regulations  Electricity Industry (Independent Market Operator) Regulations  Wholesale Electricity Market Rules These include:  monitoring compliance by Rule Participants (including the IMO) with the Market Rules and Market Procedures  investigating alleged breaches  taking enforcement action  supporting Economic Regulation Authority in monitoring effectiveness of Wholesale Electricity Market and market surveillance

5. What we do Monitoring IMO uses range of mechanisms to monitor market behaviour and compliance with Market Rules and Market Procedures:  automated spreadsheets and processes  high value focus – eg SRMC, behaviour that impacts market outcomes or confidence in the market, dispatch, outage logging, Synergy’s Balancing Portfolio, bidding behaviour and prices  voluntary compliance (ie self-reported)  investigations  periodic compliance meetings  compliance action plans  targeted compliance reviews

6. What we do Investigations IMO must investigate alleged breaches of Market Rules and Market Procedures  IMO may require information and records from Market Participants  Market Participants must cooperate with investigation  if Market Participant does not cooperate, IMO may appoint person to investigate and provide report on alleged breach Warning notices Record keeping of investigation activities

7. What we do Enforcement Breach of Market Rules – category A civil penalty provision - IMO may impose civil penalty – up to $20,000 Breach of Market Rules – category B and C civil penalty provisions – IMO application to Electricity Review Board – up to $100,000 IMO may apply to ERB for orders up to 6 years after date of contravention ERB may make binding orders (eg Market Participant must pay civil penalty, stop conduct, take specified action, etc)

8. What we do IMO Compliance Self-reporting of alleged breaches Investigations Annual compliance audit  compliance of IMO’s internal procedures and business processes with Market Rules  IMO’s compliance with Market Rules and Market Procedures  IMO’s software systems and processes for software management Publication of Market Auditor’s report on IMO website Report to Minister

9. How we do it Overview Our aim is to:  promote high levels of compliance by Rule Participants (including IMO)  achieve procedural fairness and proportionality in any enforcement action We do this by:  taking “coach-over-cop” approach to compliance – preferred IMO philosophy  ensuring our approach is consistent  not discriminating between Rule Participants – however, focussed on active Market Participants and Market Participants that represent a significant volume in the market

10. How we do it Decisions to take enforcement action IMO will aim for balanced response that takes into account:  nature and extent of contravention  circumstances in which contravention took place  actual or potential impact on other Market Participants  actual or potential impact on security and reliability of SWIS  whether Market Participant has previously engaged in similar conduct  potential impact of civil penalty imposed or order sought from ERB on Market Participant  any other relevant factors, including maximum penalty that may be imposed by ERB

11. How we do it Decisions to take enforcement action (cont’d) Other factors we may take into account are:  whether Market Participant is new to Wholesale Electricity Market  whether contravention relates to provision of Market Rules or Market Procedure that was recently implemented  whether Market Participant has effective compliance programs in place  extent to which Market Participant co-operated with IMO during investigation, and continues to cooperate with IMO in seeking to address contravention Self-reported breaches

12. How we do it Risk assessment IMO’s approach to compliance is based on risk assessment This involves analysing obligations in Market Rules and Market Procedures and ranking them according to:  impact of contravention on Market Participants and other stakeholders  probability that contravention will occur Risk assessment is used to target and prioritise IMO’s monitoring and compliance activities, ensuring most efficient use of its resources

13. What have we seen 2012 to 2013 IMO undertook 156 investigations of alleged breaches of Market Rules and Market Procedures by Market Participants and System Management between 1 July 2012 and 30 June 2013 Of those investigations:  32 investigations related to IMO  93 investigations related to Market Participants  31 investigations related to System Management

14. What have we seen 2012 to 2013 Top three areas of non-compliance for IMO:  adjusted settlement outcomes to avoid absurd outcomes  did not follow Rule Change process  delays in publication Top three areas of non-compliance for Market Participants:  non-compliance with dispatch instructions  not submitting outages properly  provision of resource plan Top three areas of non-compliance for System Management:  inadequate dispatch advisories  late provision of information  commissioning test plans approved outside allowable timeframes

15. What have we seen 2013 to 2014 IMO undertook 108 investigations of alleged breaches of Market Rules and Market Procedures by Market Participants and System Management between 1 July 2012 and 30 June 2013 Of those investigations:  10 investigations related to IMO  76 investigations related to Market Participants  22 investigations related to System Management

16. What have we seen 2013 to 2014 Top three areas of non-compliance for IMO:  did not follow rule change process  did not follow all required manual IT steps  confidentiality Top three areas of non-compliance for Market Participants:  non-compliance with dispatch instructions  not submitting outages properly  failure to acknowledge operating instructions Top three areas of non-compliance for System Management:  inadequate dispatch advisories  late provision of information  incorrect activation of LFAS facilities

17. What have we seen Constrained payments IMO’s ability to recover constrained on and constrained off payments  non-compliance with dispatch instructions  not submitting outages properly Quarterly process Amounts recovered:  $2.3 million (approx) for period 1 August 2012 to 30 June 2013  $1.5 million (approx) for period 1 July 2013 to 30 June 2014 Proposed rule change Trending downwards from average of 26 identified non-compliances with dispatch instructions per month in 2012/13 to 16 identified non-compliances per month in 2013/14 Bidding behaviour where Market Participant has advance notice of constraint

18. What’s next Targeted testing Obligations to be tested:  changes to balancing submissions after gate closure  acknowledging operating instructions Timeframe for testing:  before 31 January 2015 – Market Participants to get ready  1 February 2015 to 31 March 2015 – IMO testing How will IMO test compliance:  provide guidelines on how to comply with each obligation (via email and on IMO website)  quantitative assessment of actual non-compliances  qualitative assessment of processes in place Results  individual feedback – April 2015  aggregated feedback – May 2015 – next Compliance Update

19. Key messages Know your obligations Ensure you have appropriate compliance processes and review them regularly IMO will continue to focus on dispatch instructions and outages and behaviours that affect market outcomes and confidence Compliance testing  changes to balancing submissions after gate closure  acknowledging operating instructions

20. Questions? Morning Tea