Australian Energy Regulator v Hornsdale Power Reserve Pty Ltd

The Facts 6 The following facts are taken from the statement of agreed facts. A Glossary, insofar as it relates to expressions in the NER, is included in these reasons as Appendix A. 7 The "relevant period" for the purposes of the alleged breaches is the period from 10.05 am on 23 July 2019 (AEST) until 5.10 pm on 14 November 2019 (AEST). 8 The applicant is a body corporate established pursuant to s 44AE of the CC Act and has the functions and powers referred to in s 15 of the NEL. 9 The respondent is and was at all material times a company registered under the Corporations Act 2001 (Cth) and the owner and operator of the Hornsdale Power Reserve (the HPR). The respondent has been, since 14 November 2017, a Registered Participant in the National Electricity Market (the NEM) and was registered with the Australian Energy Market Operator (AEMO) as a Market Generator and Market Customer in relation to the HPR. 10 At all times, including during the relevant period, AEMO was the independent market and system operator for the NEM. The NEM is an interconnected power system across eastern and south-eastern Australia. AEMO's statutory functions are identified in s 49 of the NEL and they include to operate and administer the wholesale exchange where electricity and services are traded and to maintain and improve power system security (s 49(1)(a) and (e)). AEMO's obligations include using reasonable endeavours to control the frequency of the NEM within the normal operating frequency band, which was within a range of 49.85Hz to 50.15Hz 99% of the time, and 49.75Hz to 50.25Hz 1% of the time. It is agreed between the parties that while the normal operating frequency band specified in the NER is the range 49.9Hz to 50.1Hz, this range has been altered by specification in the power system security standards approved by the Reliability Panel (a panel established under s 38 of the NEL) on the advice of AEMO (which, during the relevant period, were the Frequency Operating Standards set out in the Reliability Panel's final report dated 15 April 2009) to the range of 49.85Hz to 50.15Hz 99% of the time and 49.75Hz to 50.25Hz 1% of the time. 11 Maintaining the frequency within the normal operating frequency band is necessary for the security of the power system. As a general proposition, if power generation increases, the frequency will rise and if demand for electricity increases, the frequency will fall. Therefore, maintaining equilibrium between demand and supply is necessary to keep the power system frequency within the normal operating frequency bands. If the frequency goes outside of this range, the NEM can face significant issues. 12 AEMO procures frequency control ancillary services (FCAS) to ensure that when frequency does go outside of the normal operating frequency band, the frequency recovers. 13 Under the Frequency Operating Standards that applied during the relevant period, AEMO was required to use reasonable endeavours to ensure that following most events, the system frequency should not exceed the normal operating frequency band for more than five minutes. 14 To meet its obligation to use reasonable endeavours to control the frequency of the power system, at any point in time, within the normal operating frequency band, AEMO procured during the relevant period a category of market ancillary services known as frequency FCAS. All FCAS procured by AEMO are market ancillary services under the NER and are regulated as such. 15 FCAS fall into two categories: (1) regulation FCAS, which are used continually to correct minor frequency deviations; and (2) contingency FCAS, which while always enabled are generally (but not only) used when a contingency event occurs which triggers a significant frequency deviation. This makes it difficult to detect when an FCAS provider is not complying with its offers or dispatch instructions. 16 Regulation FCAS are controlled centrally by AEMO's automatic generation control system, while contingency FCAS are controlled locally and are triggered by the frequency deviation that follows a contingency event. 17 A contingency event is defined in cl 4.2.3 of the NER and involves the failure or removal from service of a generating unit or part of the transmission network, such as a major generating unit suddenly going offline or the loss of transmission lines. A contingency event, by its nature, can occur without warning and may result in stress being placed on the NEM. 18 A provider of contingency FCAS is paid by AEMO to be on standby to provide the service of changing its power output to stabilise the frequency of the power system in the event of a material frequency deviation. A provider of contingency FCAS whose services have been enabled by AEMO is required to automatically alter their electricity supply so as to assist in stabilising the frequency for the relevant dispatch interval. 19 It is critical for power system security that providers of contingency FCAS whose services have been enabled by AEMO can and do respond according to dispatch when frequency deviations occur. Enabled FCAS units are required to monitor the local power system frequency and respond automatically to deviations of frequency by either injecting or absorbing electricity to assist AEMO by correcting frequency to the normal operating frequency band. Providers of FCAS are required to install and maintain monitoring equipment that monitors and records the response of the ancillary service generating unit or ancillary service load to changes in the frequency of the power system, so as to be capable to verify the response that they provide when enabled by AEMO. 20 There are six trading markets for different types of contingency FCAS, each for particular services that provide a particular type of response of a particular duration in the event of a frequency deviation. They are as follows: (1) the fast raise service market, where the FCAS provider bids to provide a six second response to arrest a major drop in frequency following a contingency event; (2) the fast lower service market, where the FCAS provider bids to provide a six second response to arrest a major rise in frequency following a contingency event; (3) the slow raise service market, where the FCAS provider bids to provide a 60 second response to stabilise frequency following a major drop in frequency; (4) the slow lower service market, where the FCAS provider bids to provide a 60 second response to stabilise frequency following a major rise in frequency; (5) the delayed raise service market, where the FCAS provider bids to provide a five minute response to recover frequency to the normal operating frequency band following a major drop in frequency; and (6) the delayed lower service market, where the FCAS provider bids to provide a five minute response to recover frequency to the normal operating frequency band following a major rise in frequency. 21 A Registered Participant must register with AEMO before they can make bids or offers in these markets. Once registered, a Registered Participant may submit bids or offers for the particular service. 22 To qualify for registration to participate in the markets mentioned above, a Market Participant must have had a generating unit approved by AEMO for classification as an ancillary service generating unit or a load classified as an ancillary service load. 23 To apply for the approvals referred to, AEMO requires the Market Participant to provide a number of parameters about the Market Participant's generating unit or load for each FCAS market in which it seeks to be registered. These parameters include the maximum market ancillary service capacity in MW. This is calculated according to a formula specified and published by AEMO. 24 One of the variables in the formula for calculating the maximum market ancillary service capacity is the percentage of droop. The droop defines the amount or proportionality of response to a variation in frequency: for example, the larger the variation in frequency away from the normal operating frequency band, the larger the response, in MW, that is required. 25 The droop (and the associated maximum response of the facility to a 0.5Hz frequency deviation) and the speed of that response then determines the maximum amount of FCAS that AEMO will register for a facility for the fast, slow and delayed contingency services. Clauses 3.3, 3.4, 4.3, 4.4, 5.3 and 5.4 of the market ancillary service specification (the MASS) govern, for the respective FCAS, how the amount of FCAS response is calculated for the purposes of market ancillary service offers. 26 The droop that was agreed to with AEMO at the time of registration for the HPR was 1.7%. 27 For each five-minute dispatch interval, amongst other things, the NEM dispatch engine accepts bids and offers to ensure that sufficient contingency FCAS is enabled to respond if required. AEMO enables FCAS by providing dispatch instructions to a Market Participant pursuant to cl 4.9.3A of the NER. Under cl 4.9.3A, each dispatch instruction: (1) states the relevant generating unit or load that has been selected to provide the FCAS; (2) states the service concerned; and (3) nominates the range to be enabled. 28 The NEM dispatch engine also determines a clearing price for each market for each dispatch interval. This price is used to calculate payments to the Market Participants who were enabled for that dispatch interval. Payments for contingency FCAS are recovered from Generators (for the raise services) or Market Customers (for the lower services). 29 The HPR is an electricity storage facility located near Jamestown in South Australia. During the relevant period, it used a lithium-ion battery with a capacity of 100MW. The respondent was the Registered Participant for the HPR. Tesla Motors Australia Pty Ltd (Tesla) was contracted to assist with the operation and maintenance of the HPR. The HPR is connected to South Australia's electricity transmission network, which forms part of the NEM. 30 During the relevant period, the HPR comprised a generating unit designated as "HPRG1", which AEMO classified as an ancillary service generating unit under cl 2.2.6 of the NER and a load designated "HPRL1", which AEMO classified as an ancillary service load under cl 2.3.5 of the NER. 31 During the relevant period, the respondent made market ancillary service offers to AEMO for each of the fast raise service, the slow raise service and the delayed raise service (using the HPRG1) and each of the fast lower service, the slow lower service and the delayed lower service (using the HPRL1). 32 In accordance with the requirements of the MASS, the maximum response (in MW) included in the dispatch instruction (as the upper limit of the "range enabled") was enabled to be provided if and when the frequency deviated by +/- 0.5Hz from 50Hz. 33 The HPR's registered FCAS capacity during the relevant period was for 41 MW to be delivered at the lower limit of this 49.5Hz containment band. 34 At 10.05 am on 23 July 2019, an update was performed by Tesla on the firmware for the HPR, which affected both HPRG1 and HPRL1. This update had the effect of altering settings such that the droop of the HPR (both HPRG1 and HPRL1) was 3.7%. The change in the droop reduced the maximum response capacity of HPRG1 and HPRL1 compared to what AEMO had classified as shown in the following table: MW Maximum Dispatchable capacity outside of the Relevant Period (droop at 1.7%) Maximum Dispatchable capacity during the Relevant Period (droop at 3.7%) Fast (6 sec) Slow (60 sec) Delayed (5 min) Fast (6 sec) Slow (60 sec) Delayed (5 min) HPRG1 (Raise) 63 19 41 29 9 19 HPRL1 (Lower) 63 19 41 29 9 19

35 As a consequence, during the relevant period, the HPR was not capable of providing 41MW of FCAS at the frequency of 49.50Hz, which was required in order for it to comply with the applicable dispatch instruction or market ancillary service offer (as explained at [25] and [32] above). 36 On 9 October 2019, there was an unplanned outage at Kogan Creek Power Station in Queensland (the Kogan Creek event). The respondent did not cause or contribute to the Kogan Creek event. In response to the Kogan Creek event, the power system frequency fell and the respondent was required to deliver fast raise services in accordance with the amount it was enabled to provide. The FCAS response that the respondent provided by using HPRG1 following the Kogan Creek event was less than expected and could not exceed 46% of the amount of FCAS that the respondent offered and was enabled for in the dispatch instructions in accordance with the MASS. This was caused by the change in settings which altered the droop as a consequence of the firmware update on 23 July 2019. 37 Although the FCAS response that the respondent provided (using HPRG1) following the Kogan Creek event response was less than the amount for which it had been enabled, the response assisted to bring system frequency within the normal operating frequency band as set by the Frequency Operating Standards. 38 On 12 November 2019, AEMO informed the respondent that the response of the HPR was less than the enabled contingency FCAS and not in line with the agreed droop of 1.7% when delivering FCAS. 39 The respondent was not aware until it was informed by AEMO that the contingency FCAS response from the HPR was less than what it had offered in its ancillary market services offers and been enabled to provide in dispatch instructions. 40 On 13 November 2019, Tesla investigated the under-delivery of the FCAS response from the HPR. On 14 November 2019 at 5.10 pm, the relevant settings on the firmware effecting the droop for the HPR were corrected to 1.7%. On 20 November 2019, Tesla completed its investigation and identified that the firmware update of 23 July 2019 was the cause of the under-delivery of FCAS by the HPR during the Kogan Creek event. 41 During the relevant period, AEMO gave and the respondent received 197,508 dispatch instructions pursuant to cl 4.9.3A(a) of the NER for market ancillary services that required the respondent to be ready and capable of providing, at the specified time if required, the service stated, at the nominated range, in the dispatch instruction and in which the "range" was a range of the amounts of the nominated service, up to the maximum amount specified as being enabled in the dispatch instruction, expressed in MW. 42 Of these 197,508 dispatch instructions, there were 185,738 dispatch instructions (being 97,588 dispatch instructions for HPRG1 ancillary services generating unit and 88,150 dispatch instructions for HPRL1 ancillary services load) which required the respondent to be ready and capable of providing, at the specified time if required, the range enabled in the dispatch instruction, and the respondent did not provide the capacity for which it was enabled. 43 As a result of these two matters, the respondent did not comply with 185,738 of the dispatch instructions given by AEMO as required by cl 4.9.8(a) of the NER (Version 126), which is as follows: A Registered Participant must comply with the 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.) 44 The respondent's failure to provide the capability to deliver the required proportionate response relative to the size of the frequency excursion in accordance with the MASS represented a failure to provide the relevant market ancillary service specified in the dispatch instruction, in circumstances where the HPR was, during the relevant period, enabled to deliver its full FCAS capacity. 45 During the relevant period, there were 32,602 trading intervals during which the respondent was not able to comply with its latest market ancillary service offer for the trading interval because those offers were for a response capability exceeding the maximum dispatch capacity of the HPR during the corresponding trading interval. 46 As a result of these matters, the respondent was not able to comply with the market ancillary service offers made by it for 32,602 trading intervals as required by cl 4.9.8(d) of the NER, which is as follows: 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.) 47 The response capability set out in each of the 345 market ancillary service offers made during the relevant period for the fast raise service, the slow raise service and the delayed raise service did not reflect the technical characteristics at the relevant time of HPRG1. The response capability set out in each of the 345 market ancillary service offers made during the relevant period for the fast lower service, the slow lower service and the delayed lower service did not reflect the technical characteristics at the relevant time of HPRL1. As a result of these matters, the values associated with the 690 market ancillary service offers made by the respondent did not represent the technical characteristics of HPRG1 and HPRL1, respectively, as required by cl 3.8.7A(l) of the NER, which is as follows: The following requirements apply to all market ancillary service offers for each type of market ancillary service: … (l) the values associated with the market ancillary service offer referred to in clause 3.8.7A(j) must represent technical characteristics of the ancillary service generating unit or ancillary service load … 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.) 48 The contraventions previously identified were caused by the update to the firmware performed by Tesla on 23 July 2019, which was corrected on 14 November 2019. A provider of contingency FCAS must ensure that the provider's generating unit or load is able to respond when required in accordance with amounts for which it has been enabled. 49 During the relevant period, the respondent had in place a Generator compliance program to promote its compliance, as required under the NER. This compliance program was developed such that retrospective analysis of the HPR was to be triggered by the occurrence of significant contingency events. This involved an assessment of the response of the HPR to the frequency deviation (meaning the active power fluctuation when the frequency is outside of the normal operating bands set out in the Frequency Operating Standards). However, the respondent did not identify a risk to changes in the frequency settings and therefore did not test the technical characteristics, compliance or performance of the HPR following the firmware upgrade in July 2019. As a result, the respondent did not know whether or not it could satisfy the offers that it was making. 50 The respondent did not conduct sufficient ongoing performance monitoring of the HPR's contingency FCAS performance using real-time high-speed frequency data after a major frequency deviation. During the relevant period, the respondent's systems did not detect and correct its non-compliance before being notified by AEMO on 12 November 2019, following AEMO's analysis of the Kogan Creek event. 51 Following the relevant period, the respondent immediately reviewed its compliance program and the compliance program was updated to: (1) improve its change management process, to ensure the potential impacts of firmware updates are appropriately addressed including with post-implementation controls; (2) increase real-time monitoring of the system's capability to provide frequency response; (3) include automatic frequency event response check with real-time alarming system provided by Telsa; and (4) include systematic frequency response checks post contingency event and perform at least one check per week of the system's frequency response to any deviation from the normal operating band within the last seven days if no contingency event occurred. 52 AEMO relies upon the providers of contingency FCAS such as the respondent to do what they have bid or offered to do and been enabled to provide. The HPR's inability to respond in accordance with the respondent's market ancillary service offers over a period of nearly four months impacted AEMO's ability to plan and prepare for frequency deviations. 53 While the HPR was not capable of providing 41MW of FCAS at the frequency of 49.50Hz, which was required in order for it to comply with the applicable dispatch instruction or market ancillary service offer, the HPR was capable of providing 41MW of FCAS at the frequency of 49.09Hz. The lower limit of the containment band is 49Hz for a network event or separation event, and 47Hz for a multiple contingency event. If one of these events had occurred and was sufficiently large, the HPR would have been capable of providing 41MW of FCAS at a frequency of 49.09Hz and up to the registered FCAS capacity of 100MW at a frequency of 48.00Hz (while not in compliance with the applicable instruction or offer). The frequency of 49Hz is a point at which customers are likely to be interrupted and the frequency of 48Hz is a rare and extreme frequency deviation. 54 The respondent generated revenue of $32,310,557 and delivered a profit of $10,741,006 for the year ended 31 December 2019. The majority of this revenue was produced through the supply of market ancillary services. During the relevant period, the respondent was paid $6,431,237.63 to provide contingency FCAS at the HPR. In response to a request from AEMO, in March 2021 the respondent repaid $3,383,631.51 for contingency FCAS for the relevant period by AEMO deducting that amount from amounts otherwise payable to the respondent. 55 The respondent has not been previously found to have engaged in similar conduct. 56 I turn now to the relief sought by the applicant.

The declarations 57 The applicant seeks three declarations, each relating to a contravention of a particular clause of the NER. 58 The source of the Court's power to make the declarations in this case is contained in s 44AAG(1) of the CC Act and s 21 of the Federal Court of Australia Act 1976 (Cth). The respondent consents to the making of the declarations. Nevertheless, the Court must be satisfied that the making of the declarations is appropriate. 59 I discussed the principles which are relevant to the making of declarations for contraventions of the NER in my recent decision in Australian Energy Regulator v AGL HP 1 Pty Ltd [2022] FCA 737 (AER v AGL) (at [35]-[39]). The circumstances of this case are such that it is an appropriate case for declarations because: (1) the declarations coupled with the pecuniary penalty will act as a deterrent, both to the respondent and other Registered Participants in the NEM and, therefore, there is utility in granting the declarations; (2) there is a public interest in the declarations as all members of the community have an interest in a properly functioning electricity market; (3) Parliament has indicated the extent of its disapproval of the conduct by the size of the maximum penalties. This is serious conduct and the Court should indicate its disapproval of it, not only by imposing a pecuniary penalty, but also by making declarations; and (4) the proposed declarations clearly identify the contraventions and are appropriate in their terms.

The pecuniary penalty 60 The applicant seeks an order that the respondent pay a pecuniary penalty of $900,000 in respect of the contraventions. The Court's power to order that a person pay a pecuniary penalty is contained in s 44AAG(2)(a) of the CC Act. The penalty to be imposed is to be determined "in accordance with the law". 61 Each of the clauses contravened as identified in the declarations carries a civil penalty. The NEL is the schedule to the National Electricity (South Australia) Act and s 2AA of the NEL provides that a provision of the NEL or the NER is a civil penalty provision if prescribed to be such by the Regulations. The National Electricity (South Australia) Regulations identify the three clauses referred to in the declarations as civil penalty provisions. 62 Section 64 of the NEL identifies the matters for which there must be regard in determining the amount of a civil penalty. The section provides: Every civil penalty ordered to be paid by a person declared to be in breach of a provision of this Law, the Regulations or the Rules must be determined having regard to all relevant matters, including - (a) the nature and extent of the breach; and (b) the nature and extent of any loss or damage suffered as a result of the breach; and (c) the circumstances in which the breach took place; and (d) whether the person has engaged in any similar conduct and been found to be in breach of a provision of this Law, the Rules or the Regulations in respect of that conduct; and (e) whether the service provider had in place a compliance program approved by the AER or required under the Rules, and if so, whether the service provider has been complying with that program. 63 Section 66 provides that if a breach of a civil penalty provision consists of a failure to do something that is required to be done, the breach is to be regarded as continuing until the act is done. It is not suggested that this section is not relevant in the circumstances of this case. 64 Section 67 addresses cases of conduct which is in breach of more than one civil penalty provision. It provides: (1) If the conduct of a person constitutes a breach of 2 or more civil penalty provisions, proceedings may be instituted under this Law against the person in relation to the breach of any one or more of those provisions. (2) However, the person is not liable to more than one civil penalty under this Law in respect of the same conduct. Note - Clause 39 of Schedule 2 to this Law sets out further provisions in relation to double jeopardy. 65 Before turning to the pecuniary penalty in this case, there are three matters which I can address by reference to my recent decision in AER v AGL.

The significance of the fact that the parties have agreed an amount for the pecuniary penalty 66 In AER v AGL, I said (at [52]-[54]): 52 The significance of the fact that the parties have agreed an amount for the pecuniary penalty was considered in Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; (2015) 258 CLR 482 (DFWBII). The plurality (French CJ, Kiefel J (as her Honour then was), Bell, Nettle and Gordon JJ) referred to the existence of an "important public policy involved in promoting predictability of outcome in civil penalty proceedings and that the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcome for regulators and wrongdoers" (at [46]). 53 The plurality said that the Court is not bound by the figure suggested by the parties. Their Honours said (at [48]): … The court asks "whether their proposal can be accepted as fixing an appropriate amount" and for that purpose the court must satisfy itself that the submitted penalty is appropriate. (Emphasis in original; footnote omitted.) The plurality also said (at [58]). … Subject to the court being 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 consistent with principle and, for the reasons identified in Allied Mills, highly desirable in practice for the court to accept the parties' proposal and therefore impose the proposed penalty. … (Emphasis in original; footnote omitted.) 54 Finally (for present purposes), the plurality referred to the assistance the Court may obtain as to the appropriate penalty from the regulator which is, it is to be expected, in a position to offer "informed submissions as to the effects of contravention on the industry and the level of penalty necessary to achieve compliance" (at [60]).

The importance of deterrence 67 In AER v AGL, I said (at [55]-[56]): 55 The purpose of a civil penalty is primarily, if not wholly, protective in promoting the public interest in compliance (Trade Practices Commission v CSR Limited [1990] FCA 762; (1991) ATPR 41-076 (CSR Limited) at 52,151-52,152 per French J (as his Honour then was); DFWBII at [55] per French CJ, Kiefel, Bell, Nettle and Gordon JJ; Pattinson at [14]-[19] per Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ). 56 In the context of the civil penalty regime under the Fair Work Act 2009 (Cth), the plurality in Pattinson said (at [43]) that the primary objective of the regime was deterrence and at [40], their Honours referred with approval to the observations of Burchett and Kiefel JJ in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 (NW Frozen Foods) (at 293) as follows: … [I]nsistence upon the deterrent quality of a penalty should be balanced by insistence that it "not be so high as to be oppressive". Plainly, if deterrence is the object, the penalty should not be greater than is necessary to achieve this object; severity beyond that would be oppression. The plurality in Pattinson went on to say that it is necessary for a civil penalty to be fixed in a way which strikes a reasonable balance between deterrence and oppressive severity (at [41]).

The relevance of the maximum penalty 68 In AER v AGL, I said (at [49]-[51]): 49 The High Court recently considered the role of the maximum penalty in fixing a civil penalty in Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; (2022) 399 ALR 599 (Pattinson). The plurality of Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ said that it was an error to treat the statutory maximum as implicitly requiring that contraventions be graded on a scale of increasing seriousness, with the maximum to be reserved exclusively for the worst category of contravening conduct (at [49]) or as controlling, as distinct from being balanced with all other relevant factors (at [52]). 50 The plurality then (at [53]) referred to the following passage from the decision of the Full Court of this Court in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; (2016) 340 ALR 25 (at [155]-[156]): "The reasoning in Markarian about the need to have regard to the maximum penalty when considering the quantum of a penalty has been accepted to apply to civil penalties in numerous decisions of this Court both at first instance and on appeal. As Markarian makes clear, the maximum penalty, while important, is but one yardstick that ordinarily must be applied. Care must be taken to ensure that the maximum penalty is not applied mechanically, instead of it being treated as one of a number of relevant factors, albeit an important one. Put another way, a contravention that is objectively in the mid-range of objective seriousness may not, for that reason alone, transpose into a penalty range somewhere in the middle between zero and the maximum penalty. Similarly, just because a contravention is towards either end of the spectrum of contraventions of its kind does not mean that the penalty must be towards the bottom or top of the range respectively. However, ordinarily there must be some reasonable relationship between the theoretical maximum and the final penalty imposed." (citations omitted) 51 The plurality in Pattinson then went on to say (at [54]-[55]): 54 Two aspects of the Full Court's reasoning in this passage from Reckitt Benckiser deserve particular emphasis here. The first is their Honours' recognition that the maximum penalty is "but one yardstick that ordinarily must be applied" and must be treated "as one of a number of relevant factors". As has already been seen, other factors relevant for the purposes of the civil penalty regime include those identified by French J in CSR. 55 The second point is that the maximum penalty does not constrain the exercise of the discretion under s 546 (or its analogues in other Commonwealth legislation), beyond requiring "some reasonable relationship between the theoretical maximum and the final penalty imposed". This relationship of "reasonableness" may be established by reference to the circumstances of the contravenor as well as by the circumstances of the conduct involved in the contravention. That is so because either set of circumstances may have a bearing upon the extent of the need for deterrence in the penalty to be imposed. And these categories of circumstances may overlap. 69 There are a large number of separate contraventions in this case. The applicant accepted that because of the large number of contraventions in this case, and the fact that they all resulted from the act performed by Tesla at 10.05 am on 23 July 2019 to update the firmware for the HPR such that the settings were altered, including the droop of the HPR and the failure to detect this thereafter, reference to the maximum penalty is not "a particularly informative task" and would result in a maximum penalty which is "outside the bounds of what would be appropriate". The parties were agreed that the respondent's conduct should be viewed, for the purposes of fixing the pecuniary penalty, as a single course of conduct. I accept this submission and will proceed on that basis. I note the observations of Beach J in Australian Energy Regulator v Snowy Hydro Limited (No 2) [2015] FCA 58 (at [107] and [118]) as to what is and is not the same conduct for the purposes of s 67 of the NEL and the "course of conduct" principle.

Relevant considerations 70 I have already identified the matters which are set out in s 64 of the NEL. In addition, the cases indicate a range of other matters which may be relevant in the determination of a civil penalty depending on the circumstances of the case. It is sufficient for me to set out the following passage in Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; (2022) 399 ALR 599 (at [18] per Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ): In CSR, French J listed several factors which informed the assessment under the Trade Practices Act 1974 (Cth) of a penalty of appropriate deterrent value: "The assessment of a penalty of appropriate deterrent value will have regard to a number of factors which have been canvassed in the cases. These include the following: 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." (Citation omitted.)

This case 71 In the end, both parties focused on matters indicating the seriousness of the breaches on the one hand, and matters of mitigation on the other. In performing the Court's task and bearing in mind the High Court's observations in Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; (2015) 258 CLR 482 (relevantly extracted above at [66]), it is sufficient for me to focus on those matters. 72 The applicant identified six matters which in its submission lead to the conclusion that the contraventions are serious and of significance. 73 The first matter identified by the applicant is the critical importance of FCAS to power system security and the harm that can potentially flow to end-users of electricity if power system security is compromised. The applicant pointed out that the power system depends for its reliability and safety on the maintenance of the equilibrium between power generation, that is, the supply of electricity, and load, that is, the demand for electricity. If the frequency of the power system varies outside the specified band, then that can cause significant issues for the NEM. For example, it can lead to generation or load shedding. AEMO uses as one of the tools to maintain the frequency of the power system, FCAS and it procures FCAS to ensure that when the frequency does go outside the normal operating frequency band, the frequency recovers. 74 The second matter identified by the applicant is the number of contraventions. There are a large number of contraventions; the total number is nearly 220,000. 75 The third matter identified by the applicant is the period of time over which the contraventions occurred; the period is in the order of four months. 76 The fourth matter identified by the applicant is the failure of the respondent's compliance system to detect and correct the non-compliance during the relevant period. As I have said, during the relevant period, the respondent had in place a Generator compliance program to promote its compliance as required under the NER. This compliance program was developed such that retrospective analysis of the HPR was to be triggered by the occurrence of sufficient contingency events. This involved an assessment of the response of the HPR to the frequency deviation. However, the respondent did not identify a risk to changes in the frequency settings and, therefore, did not test the technical characteristics, compliance or performance of the HPR following the firmware upgrade in July 2019. As a result, the respondent did not know whether or not it could satisfy the offers that it was making. The respondent did not conduct sufficient ongoing performance monitoring of the HPR's contingency FCAS performance using real-time high-speed frequency data after a major frequency deviation. Furthermore, during the relevant period, the respondent's systems did not detect and correct its non-compliance before being notified by AEMO on 12 November 2019 following AEMO's analysis of the Kogan Creek event. 77 The fifth matter identified by the applicant is the amount of the financial benefit that the respondent derived while it was in contravention of the NER. It is relevant to note in this context that following a request from AEMO, in March 2021 the respondent repaid $3,383,631.51 for contingency FCAS for the relevant period. 78 The sixth matter identified by the applicant is the difficulty in detecting contraventions of a capability to provide FCAS until the service is in fact required to be actively delivered during a network event, by which time it is too late for AEMO or the Market Participant to take pre-emptive action to prevent the non-compliance arising. This is an important matter and it was emphasised by the applicant in its oral submissions. As the applicant's counsel submitted, the type of contraventions in this case only become apparent following the necessity of the services being drawn upon and being found not to be there. I accept the submission made by the applicant that because it is difficult for the market operator and the regulator to detect non-compliance before the services are actually deployed during a frequency deviation, it is important in determining the size of the pecuniary penalty to take into account the need to promote proactive compliance by providers given the difficulty of detection otherwise. 79 The respondent asked me to take into account the following matters, all of which are present as is clear from the agreed facts: (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. 80 Taking these matters into account, I consider that the proposed pecuniary penalty of $900,000 is just and appropriate and a penalty determined in accordance with the law.

Costs 81 I will make the costs order as sought by the parties. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Besanko.

Associate: Dated: 28 June 2022 Appendix A Glossary ancillary service generating unit A generating unit which has been classified in accordance with Chapter 2 as an ancillary service generating unit. ancillary service load A market load or load which has been classified in accordance with Chapter 2 as an ancillary service load. contingency event An event described in clause 4.2.3(a). delayed lower service The service of providing, in accordance with the market ancillary service specification, the capability of controlling the level of generation or load associated with a particular facility in response to a change in the frequency of the power system beyond a threshold or in accordance with electronic signals from AEMO in order to lower that frequency to within the normal operating frequency band. delayed raise service The service of providing, in accordance with the market ancillary service specification, the capability of controlling the level of generation or load associated with a particular facility in response to a change in the frequency of the power system beyond a threshold or in accordance with electronic signals from AEMO in order to raise that frequency to within the normal operating frequency band. dispatch instruction An instruction given to a Registered Participant under clauses 4.9.2, 4.9.2A, 4.9.3, 4.9.3A, or to an NMAS provider under clause 4.9.3A. dispatch interval A period defined in clause 3.8.2.2(a1) in which the dispatch algorithm is run in accordance with clause 3.8.21(b). enabled A market ancillary service is enabled when AEMO has selected the relevant generating unit or load for the provision of the market ancillary service and has notified the relevant Market Participant accordingly. An inertia network service is enabled when AEMO has selected the relevant inertia network service and the service is providing inertia to an inertia sub-network. An activity approved by AEMO under clause 5.20B.5(a) is enabled when AEMO has selected the relevant activity and the activity is performing and available in accordance with any conditions of that approval. A system strength service is enabled when AEMO has selected the relevant system strength service and the service is contributing to the three phase fault level at the relevant fault level node. fast lower service The service of providing, in accordance with the requirements of the market ancillary service specification, the capability of rapidly controlling the level of generation or load associated with a particular facility in response to the locally sensed frequency of the power system in order to arrest a rise in that frequency. fast raise service The service of providing, in accordance with the requirements of the market ancillary service specification, the capability of rapidly controlling the level of generation or load associated with a particular facility in response to the locally sensed frequency of the power system in order to arrest a fall in that frequency. generating unit The plant used in the production of electricity and all related equipment essential to its functioning as a single entity. Generator A person who engages in the activity of owning, controlling or operating a generating system that is connected to, or who otherwise supplies electricity to, a transmission or distribution system and who is registered by AEMO as a Generator under Chapter 2. For the purposes of Chapter 5, the term includes a person who is required or intends to register in that capacity or is a non-registered embedded generator (as defined in clause 5A.A.1) who has made an election under clause 5A.A.2(c). load A connection point or defined set of connection points at which electrical power is delivered to a person or to another network or the amount of electrical power delivered at a defined instant at a connection point, or aggregated over a defined set of connection points. market ancillary service A service identified in clause 3.11.2(a). market ancillary service offer A notice submitted by an Ancillary Service Provider to AEMO in respect of a market ancillary service in accordance with clause 3.8.7A. Market Customer A Customer who has classified any of its loads as a market load and who is also registered by AEMO as a Market Customer under Chapter 2. Market Generator A Generator who has classified at least one generating unit as a market generating unit in accordance with Chapter 2 and who is also registered by AEMO as a Market Generator under Chapter 2. Market Participant A person who is registered by AEMO as a Market Generator, Market Customer, Market Small Generation Aggregator, Market Ancillary Service Provider or Market Network Service Provider under Chapter 2. normal operating frequency band In relation to the frequency of the power system, means the range 49.9Hz to 50.1Hz or such other range so specified in the power system security standards. power system The electricity power system of the national grid including associated generation and transmission and distribution networks for the supply of electricity, operated as an integrated arrangement. Registered Participant A person who is registered by AEMO in any one or more of the categories listed in rules 2.2 to 2.7. However: (a) in the case of a person who is registered by AEMO as a Trader, such a person is only a Registered Participant for the purposes referred to in rule 2.5A; (b) in the case of a person who is registered by AEMO as a Metering Coordinator, such a person is only a Registered Participant for the purposes referred to in clause 2.4A.1(d); (c) as set out in rule 2.11.1A, for the purposes of rule 2.11 only, Third Party B2B Participants (other than Third Party B2B Participants who are also Embedded Network Managers) are also deemed to be Registered Participants; (d) as set out in clause 8.2.1(a1) and 8.2A.2(b), for the purposes of some provisions of rule 8.2 only, AEMO, Connection Applicants, Metering Providers, Metering Data Providers, Third Party B2B Participants and B2B Change Parties who are not otherwise Registered Participants are also deemed to be Registered Participants; (e) as set out in clause 8.6.1A, for the purposes of Part C of Chapter 8 only, Metering Providers, Metering Data Providers and Third Party B2B Participants who are not otherwise Registered Participants are also deemed to be Registered Participants; and (f) as set out in clause 4.8.12(a3), for the purposes of Part C of Chapter 8 only, Jurisdictional System Security Coordinators are also deemed to be Registered Participants. transmission network A network within any participating jurisdiction operating at nominal voltages of 220kV and above plus: (a) any part of a network operating at nominal voltages between 66 kV and 220 kV that operates in parallel to and provides support to the higher voltage transmission network; (b) any part of a network operating at nominal voltages between 66kV and 220 kV that is not referred to in paragraph (a) but is deemed by the AER to be part of the transmission network. For a participating jurisdiction other than the State of Victoria, an identified shared user asset owned, controlled or operated by a Primary Transmission Network Service Provider (including a third party IUSA that is the subject of a network operating agreement) forms part of that Primary Transmission Network Service Provider's transmission network.