On 1 April 2006, the then Minister for Energy, Hon Francis Logan MLA, made an order under section 82(1) of the Electricity Corporations Act 2005 prescribing the terms and conditions of the initial contractual arrangements between the Electricity Generation Corporation (“Verve Energy”) and the Electricity Retail Corporation (“Synergy”) relating to the supply of Capacity Credits and electricity to Synergy, this contract was titled and was known as the Vesting Contract.
The Vesting Arrangements were a transitional mechanism supporting the development of a competitive electricity market in Western Australia. These arrangements commenced upon the disaggregation of Western Power Corporation on 1 April 2006.
The Vesting Arrangements comprised of the Vesting Contract (2006) and a Ministerial Direction issued under the Electricity Corporations Act 2005 (the “Displacement Mechanism Ministerial Direction”).
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 Contract (2006) provided wholesale supply of electricity and capacity credits to meet the following sales obligations that Synergy 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 inherited from Western Power Corporation.
While the Vesting Contract (2006) initially covered a significant proportion of wholesale supply in the South West Interconnected System, the contract volumes declined as:
retail sales agreements inherited by Synergy expired;
contestable tariff customers accepted retail sales agreements from any retailer; and
Synergy undertook displacement in accordance with the “Displacement Mechanism” defined in the Vesting Contract and the Ministerial Direction.
Some of the key features of the Vesting Contract (2006) were:
The Contract Administrator:
A Contract Administrator annually recalculated specific volume and price terms under the Vesting Contract (2006). The formulae to make these calculations were specified in the schedules to the Vesting Contract (2006). The Contract Administrator also:
made determinations on the roll forward or backward, and on deferrals under the Displacement Mechanism, and
resolved 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 was the Minister for Energy, or a person delegated by the Minister for Energy. The Minister for Energy delegated the role of the Contract Administrator to the Coordinator of Energy.
Netback Pricing:
Pricing was based on a “netback calculation”, which meant that Verve Energy was paid the residual of Synergy’s sales revenues less efficient retail, networks, and other costs. That is, Synergy paid Verve Energy fixed and variable prices so that Verve Energy received the equivalent of:
the revenue Synergy received from the relevant tariff and contract sales;
less a defined allowance for Synergy’s costs, including an efficient profit margin, which was retained by Synergy;
less regulated networks costs paid to the Electricity Networks Corporation (“Western Power”); and
less other specified market and regulatory costs.
The Displacement Mechanism:
The Vesting Contract (2006) contained a Displacement Mechanism that required Synergy to expose the Vesting Contract (2006) volumes to competitive sourcing outside of the Vesting Contract (2006). The displacement occurred through:
“negotiated” arrangements, which Synergy entered into at any time, up to specified limits; and
"tendered” arrangements, which occurred in a scheduled, orderly tender process.
The Displacement Mechanism gradually reduced the amount of electricity and capacity credits traded under the Vesting Contract (2006), and transitioned both Synergy and Verve Energy into the Wholesale Electricity Market.
Balancing Hedge:
The Vesting Contract (2006) included a financial hedge to manage Synergy’s risk in the balancing market, but also exposed 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 was to ensure that:
the tender processes that Synergy undertook to fulfil its obligations under the Displacement Mechanism in the Vesting Contact (2006) were open and fair; and
the market was provided with appropriate information to participate in the tender processes.
The key features of the Displacement Mechanism Ministerial Direction were:
The Tender Process:
The Displacement Mechanism Ministerial Direction specified the guidelines that Synergy must follow in running the tender process under the Displacement Mechanism specified in the Vesting Contract (2006). This included that Verve Energy must be treated equally with all other tenderers and was not to be afforded any special treatment or benefit.
The Annual Displacement Statement of Opportunities:
The Displacement Mechanism Ministerial Direction specified 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") was intended to provide potential bidders in the tender processes with appropriate information with which to make a bid. Synergy published the ADSOO annually by 30 November. The first ADSOO was published in 2006.
Vesting Contract 2006:
The Vesting Contract 2006 was amended eight times. The document provided on this website is consolidated to include these amendments. The overview of the Vesting Contract also provides further information.
Replacement Vesting Contract 2010:
Under section 84(1) of the Electricity Corporations Act 2005 the Vesting Contract has been cancelled and replaced with with the Replacement Vesting Contract (2010).
The Displacement Mechanism Ministerial Direction has been cancelled.
