The Vesting Arrangements are a transitional mechanism supporting the development of a competitive electricity market in Western Australia. The Vesting Arrangements provide for the wholesale supply of energy and Capacity Credits between the Electricity Generation Corporation (“Verve Energy”) and the Electricity Retail Corporation (“Synergy”). These arrangements commenced upon the disaggregation of Western Power Corporation on 1 April 2006.

The Electricity Reform Task Force recommended that wholesale energy contracts should be established between the Generation Corporation and Retail Corporation at the time of Western Power’s disaggregation to:

• provide for supply to the existing retail customers of Western Power Corporation;
• mitigate the market power of Western Power’s successor entities; and
• provide for a smooth transition to the new wholesale electricity market.

The Vesting Arrangements are comprised of the Vesting Contract and a Ministerial Direction issued under the Electricity Corporations Act 2005 (the “Displacement Mechanism Ministerial Direction”).

The Vesting Contract

The Vesting Contract provides wholesale supply of electricity and capacity credits  to meet the following sales obligations that Synergy has inherited:

• customers that are not contestable and are supplied on a published tariff;
• customers that are contestable, but remain on a published tariff rather than accept a retail sales agreement; and
• customers that are on contestable retail sales agreements that Synergy has inherited from Western Power Corporation.

While the Vesting Contract initially covers a significant proportion of wholesale supply in the South West Interconnected System, the contract volumes will decline automatically as the electricity market becomes more competitive. The Vesting Contract volume will decline as:

• retail sales agreements that are inherited by Synergy expire;
• contestable tariff customers accept retail sales agreements from any retailer; and
• Synergy undertakes displacement in accordance with the “Displacement Mechanism” defined in the Vesting Contract.

Some of the key features of the Vesting Contract are:

The Contract Administrator:

A Contract Administrator annually recalculates specific volume and price terms under the Vesting Contract. The formulae to make these calculations are specified in the schedules to the Vesting Contract. The Contract Administrator also:

• makes determinations on the roll forward or backward, and on deferrals under the Displacement Mechanism, and
• resolves any issues that may arise under the Vesting Contract, such as force majeure, changes in law, or changes in the wholesale market rules.

The Contract Administrator is to be the Minister for Energy, or a person delegated by the Minister for Energy. The Minister for Energy has delegated the role of the Contract Administrator to the Coordinator of Energy.

Netback Pricing:

Pricing is based on a “netback calculation”, which means that Verve Energy is paid the residual of Synergy’s sales revenues less efficient retail, networks, and other costs. That is, Synergy pays Verve Energy fixed and variable prices so that Verve Energy receives the equivalent of:

• the revenue Synergy receives from the relevant tariff and contract sales;
• less a defined allowance for Synergy’s costs, including an efficient profit margin, which is retained by Synergy;
• less networks costs paid to the Electricity Networks Corporation (“Western Power”); and
• less other specified market and regulatory costs.

The Displacement Mechanism:

The Vesting Contract contains a Displacement Mechanism that requires Synergy to expose the Vesting Contract volumes to competitive sourcing outside of the Vesting Contract. The displacement is to occur through:

• “negotiated” arrangements, which Synergy may enter into at any time, up to specified limits; and
• "tendered” arrangements, which occur in a scheduled, orderly tender process.

The Displacement Mechanism will gradually reduce the amount of electricity and capacity credits  traded under the Vesting Contract, and will transition both Synergy and Verve Energy into the Wholesale Electricity Market.

Balancing Hedge:

The Vesting Contract includes a financial hedge to manage Synergy’s risk in the balancing market, but also exposes Synergy to increased costs for excessive nomination errors as a means to provide it with an incentive to forecast accurately.

The Displacement Mechanism Ministerial Direction

The Displacement Mechanism Ministerial Direction is to ensure that:

• the tender processes that Synergy undertakes to fulfil its obligations under the Displacement Mechanism in the Vesting Contact are open and fair; and
• the market is provided with appropriate information to participate in the tender processes.

The key features of the Displacement Mechanism Ministerial Direction are:

The Tender Process:

The Displacement Mechanism Ministerial Direction specifies the guidelines that Synergy must follow in running the tender process under the Displacement Mechanism specified in the Vesting Contract. This includes that Verve Energy must be treated equally with all other tenderers and is not to be afforded any special treatment or benefit.

The Annual Displacement Statement of Opportunities:

The Displacement Mechanism Ministerial Direction specifies that Synergy must annually publish certain information, such as the volumes that will be available for tender in the future, and the average vesting price. The Annual Displacement Statement of Opportunities ("ADSOO") is intended to provide potential bidders in the tender processes with appropriate information with which to make a bid. Synergy publishes the ADSOO annually by 30 November. The first ADSOO was published in 2006.

Further Information

The Vesting Contract has been amended five times – on 1 June 2006, on 1 September 2006, on 1 December 2006, on 19 December 2006 and on 19 November 2007. The draft provided on this website is consolidated to include these amendments.

An Overview of the Vesting Arrangements is now available to download.

To make any other enquiries about the Vesting Arrangements, please email stephen.eliot@energy.wa.gov.au.