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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019



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ISSN 1328-8091

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BILLS DIGEST NO. 47, 2019-20 8 NOVEMBER 2019

Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 Jonathan Mills and Paula Pyburne Law and Bills Digest Section

Contents

The Bills Digest at a glance .............................................. 4

History of the Bill ............................................................ 5

Purpose of the Bill ........................................................... 5

Structure of the Bill ......................................................... 5

Background ..................................................................... 5

Regulation of the industry........................................... 5

Functions and regulators ............................................ 6

Table 1: electricity supply functions and regulators .................................................................. 7

Pricing and reliability issues ........................................ 8

Electricity supply and prices inquiry ......................... 10

Fair deal on energy policy ....................................... 11

Committee consideration .............................................. 11

Senate Standing Committee on Economics .............. 11 Senate Standing Committee for the Scrutiny of Bills ............................................................................ 12

Policy position of non-government parties/independents.................................................... 12

Australian Labor Party ............................................... 12

Australian Greens ...................................................... 12

Independents ............................................................ 13

Position of major interest groups................................... 13

Industry groups ......................................................... 13

Consumers ................................................................. 14

Unions ....................................................................... 14

Financial implications .................................................... 14

Statement of Compatibility with Human Rights.............. 14

Parliamentary Joint Committee on Human Rights ... 14 Key issues and provisions .............................................. 14

Date introduced: 18 September 2019

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 and Schedule 2 on Royal Assent; Schedule 1 six months after Royal Assent

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at November 2019.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 2

Schedule 1—key issues and provisions ........................... 14

Application to corporations ...................................... 15

How the electricity market works ............................. 16

About the spot market ............................................ 16

About the contract market ..................................... 17

Prohibited conduct type 1: retail pricing .................. 17 Exceptions ............................................................... 18

Key issue—reasonable adjustments ....................... 18 Prohibited conduct type 2: electricity financial contract liquidity ....................................................... 19

Why liquidity is important ....................................... 20

Key issue—substantially lessening competition ..... 20 Prohibited conduct type 3: electricity spot market (basic case) ................................................................ 21

Key issue—identifying the prohibited conduct ....... 22 Stakeholder comments ........................................... 22

Prohibited conduct type 4: electricity spot market (aggravated case) ...................................................... 23

About gaming .......................................................... 23

Purpose.................................................................... 23

Remedies ................................................................... 24

ACCC and prohibited conduct ................................... 24

Public warning notices ............................................ 24

Stakeholder comments ........................................... 25

Infringement notices ............................................... 25

Comment ................................................................. 25

Treasurer action—preliminary steps ........................ 26

Step 1: issue a prohibited conduct notice ............... 26 Varying or revoking a prohibited conduct notice ... 26 Step 2: ACCC gives notice to the Treasurer............. 27 Prohibited conduct recommendation ..................... 27

Varying or revoking a prohibited conduct recommendation ................................................... 27

No Treasurer action notice...................................... 28

Varying or revoking a no Treasurer action notice ..................................................................... 28

Contracting order in response to prohibited conduct ...................................................................... 29

Making a contracting order ..................................... 30

Varying or revoking a contracting order ............... 30 Enforcing contracting orders ................................... 31

Stakeholder comments ........................................... 31

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 3

Divestiture order in response to prohibited conduct ...................................................................... 31

Treasurer must be satisfied ..................................... 31

Court must be satisfied ........................................... 32

Order under subsection 153ZB(2) ......................... 32

First reading of the Bill ............................................ 32

Order under subsection 153ZB(3) ......................... 32

After the Labor amendments .................................. 33

Order under subsection 153ZB(3) ......................... 33

Acquisition of property ........................................... 33

Key issue—divestiture ............................................. 34

Existing divestiture power for mergers ................. 34 Stakeholder comments ........................................... 35

Reviews considering divestiture ............................. 35

Other provisions ........................................................... 35

Schedule 2—key issues and provisions ........................... 36

Potential for retail electricity industry code ........... 36 Regulation-making .................................................. 37

Potential for retail electricity industry code ........... 38 Other provisions ........................................................ 38

Confidentiality ......................................................... 38

Obtaining information and documents ................... 38 Concluding comments ................................................... 39

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 4

The Bills Digest at a glance

Purpose of the Bill

The main purpose of the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 is to implement a legislative framework consisting of new prohibitions and remedies in relation to electricity retail, contract and wholesale markets.

The provisions of Schedule 1 to the Bill (the new prohibitions and remedies) cease to be in force on 1 January 2026.

Prohibited conduct

The Bill identifies four types of relevant conduct:

1. prohibited conduct in relation to retail prices

2. prohibited conduct in relation to the electricity financial contract market

3. prohibited conduct in relation to the electricity spot market (basic) and

4. prohibited conduct in relation to the electricity spot market (aggravated).

Proposed remedies

The Bill sets out a range of remedies that are to be applied in relation to the four types of prohibited conduct set out above. These include for the ACCC- in respect of any of the prohibited conduct- issuing a public warning notice or issuing an infringement notice. These remedies are in addition to existing remedies in the Competition and Consumer Act 2010 such as accepting a court-enforceable undertaking and applying to the court for an injunction.

The remedies available to the Treasurer are making a contracting order—in respect of type 2 and type 4 prohibited conduct and applying for a divestiture order from the Federal Court—in respect of type 4 prohibited conduct only.

Powers for the Australian Energy Regulator (AER)

Schedule 2 to the Bill:

• Provides the AER with new compulsory information gathering powers

• Allows the AER to share information with other agencies and

• Confers on the AER functions related to the regulation of retail electricity prices.

What is different?

The current form of the Bill is slightly different from the version which was introduced into the 45th Parliament. The major changes are:

• Exceptions have been provided in relation to the prohibited conduct in retail pricing

• The Australian Competition and Consumer Commission is no longer required to publish a no Treasurer action notice

• The Treasurer is no longer required to publish a contracting order or variation or revocation of such an order, but must instead publish certain information about the order, variation or revocation

• The powers to make divestiture orders have been clarified.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 5

History of the Bill The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 (the first Bill) was introduced into the House of Representatives on 5 December 2018.1 However, the first Bill lapsed when the 45th Parliament was dissolved on 11 April 2019.

The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 (the Bill) was introduced into the House of Representatives on 18 September 2019. It is largely in equivalent terms to the first Bill but is not exactly the same.

Much of the material in this Bills Digest will replicate the material in the Bills Digest for the first Bill.2 Where there are differences they are highlighted.

Purpose of the Bill The main purpose of the Bill is to amend the Competition and Consumer Act 2010 (CCA) to insert new prohibitions and remedies for breaches of those prohibitions in relation to conduct in electricity markets.

Importantly, the provisions in Schedule 1 to the Bill cease to be in force on 1 January 2026.3

Structure of the Bill The Bill comprises two Schedules. Schedule 1 relates to prohibited conduct in the electricity industry. Within Schedule 1, Part 1 sets out the main amendments—including the power for the Treasurer to make an application to the Federal Court seeking an order directing the person who has engaged in prohibited conduct to divest specified assets. Part 2 of Schedule 1 contains consequential amendments. Part 3 sets out relevant application provisions.

Schedule 2 to the Bill amends the CCA to enhance the information gathering power of the Australian Energy Regulator (AER) and confers on the AER functions related to the regulation of retail electricity prices.

Background

Regulation of the industry Electricity has historically developed at a state level, with state-based electricity government-owned entities (such as the State Electricity Commission of Victoria which was established following WWI) responsible for all supply functions as vertically integrated entities until the late 1980s.4 Since then, different functions and activities in the supply of electricity have been structurally separated in most (but not all) jurisdictions with some parts of the sector privatised. This occurred in response to the development of a national grid (on the east coast through the development of the national electricity market (NEM)) and different views about the role of government and government regulation.5

1. Parliament of Australia, ‘Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 homepage’, Australian Parliament website. 2. J Mills and P Pyburne, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018, Bills digest, 72, 2018-19, Parliamentary Library, Canberra, 29 March 2019. 3. CCA, proposed section 153B, at item 1 of Schedule 1 to the Bill. 4. State Electricity Commission of Victoria (SEC), ‘History’, SEC website. 5. Australian Energy Market Operator (AEMO), ‘National Electricity Market’, AEMO website.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 6

The Commonwealth’s involvement is based on a co-operative legislative regime which has evolved under the aegis of a 2004 inter-governmental agreement on the regulation of the industry.6 The Council of Australian Governments (COAG) Energy Council (the Energy Council) is a Ministerial forum for the Commonwealth, states and territories and New Zealand, to work together in the pursuit of national energy reforms. It was established by COAG in December 2013. The work of the Energy Council broadly covers:

• overarching responsibility and policy leadership for Australian gas and electricity markets

• promotion of energy efficiency and energy productivity in Australia

• Australian electricity, gas and petroleum product energy security

• cooperation between Commonwealth, state and territory governments and

• facilitating the economic and competitive development of Australia’s mineral and energy resources.7

The complex system of regulation of the electricity market arises because there is no specific plenary power under the Constitution which allows the Commonwealth to make laws about the generation and supply of electricity in its own right. (See the discussion about Constitutional issues arising from the Bill below.) The co-operative regulatory arrangements currently consist of the following:

• CCA which establishes the AER

• National Electricity (South Australia) Act 1996 which has been applied as a law in other states and territories through application Acts—the National Electricity Law is a Schedule to that Act8 and

• National Electricity Rules which are made by the Australian Energy Markets Commission (AEMC)9 and

• Australian Energy Market Act 2004 which is the Commonwealth application law applying to the offshore area of Australia.

Functions and regulators A summary of the various functions in electricity supply and the relevant regulator is presented in Table 1 below. This generally summarises the situation in the NEM states. Western Australia and the Northern Territory have different arrangements that reflect their specific geography (small and dispersed populations) and the fact that they are not connected to the electricity grid in the same way as the other states and the Australian Capital Territory.

6. Council of Australian Governments (COAG) Energy Council, Australian Energy Market Agreement, 30 June 2004. Note that the Agreement was most recently updated in 2013: COAG Energy Council, Australian Energy Market Agreement, 9 December 2013.

7. COAG Energy Council, ‘Our role’, COAG Energy Council website. 8. For example, the Electricity—National Scheme (Queensland) Act 1997, the National Electricity (New South Wales) Act 1997, and the Electricity (National Scheme) Act 1997 which was enacted in the Australian Capital Territory. 9. Australian Energy Markets Commission (AEMC), ‘National Electricity Rules’, AEMC website.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 7

Table 1: electricity supply functions and regulators

Function Regulator

Enforcing rules and economic regulation of electricity transmission and distribution networks and retail markets

Australian Energy Regulator (AER)10 The AER applies the laws as made by individual jurisdictions modelled on the National Electricity (South Australia) Act 1996 (SA) which has been applied as a law in other states and territories.

Rule-making and market development for transmission and distribution and retail markets

Australian Energy Markets Commission (AEMC)11 which is established by the Australian Energy Commission Establishment Act 2004.

Wholesale market arrangements Australian Energy Market Operator (AEMO)12 operates spot market (gross pool) and dispatch arrangements. AEMO is the independent energy markets and power systems operator. It provides critical planning, forecasting and power systems information, security advice and services to stakeholders.

Network connections and planning AEMO

Licencing of retailers/network providers/generators This is carried out by state-based regulators (for example: Independent Pricing and Regulatory Tribunal

(IPART)13 in NSW; Essential Services Commission14 (Vic) in Victoria). State-based legislation applies. For example, in Victoria, the Electricity Industry Act 2000 (Vic) requires all electricity generators, distributors and retailers operating in Victoria to be licensed by the Essential Services Commission, or be exempted under an Order in Council.

Household price regulation State-based regulators in some states (Office of the Tasmanian Economic Regulator,15 Queensland Competition Authority, Independent Competition and Regulatory Commission (ACT)).16 There is no household price regulation in Victoria (since 2009), South Australia (since early 2012) and NSW (since mid-2014). Prices remain directly set by the government in the Northern Territory17 and Western Australia18 (this was the norm across all jurisdictions prior to disaggregation of state-based government-owned vertically integrated electricity providers from the early 1990s).

10. Australian Energy Regulator (AER), ‘About us’, AER website. AER was initially established by the Trade Practices Amendment (Australian Energy Regulator) Act 2004. 11. AEMC, AEMC website. 12. AEMO, AEMO website. 13. Independent Pricing and Regulatory Tribunal (IPART), ‘About IPART’, IPART website. 14. Essential Services Commission (ESC), ‘About us’, ESC website. 15. Office of the Tasmanian Economic Regulator (OTTER), ‘About us’, OTTER website, last published 20 November 2017.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 8

Complaints/consumer protection framework National Energy Customer Framework (NECF)19 implementation involves the transfer of current state

and territory (except Western Australia and the Northern Territory) legislation to a single set of national Laws, Regulations and Rules. Consumer protections include a range of provisions such as guaranteed access to an offer of supply for electricity, a customer hardship regime, limitations on disconnection, including processes to follow, restrictions on when disconnections can occur and mandatory minimum terms and conditions for retail and connection contracts for all residential and small business customers. Where applicable, state and territory energy laws continue to supplement key customer protection aspects of the NECF through measures such as energy ombudsman and guaranteed service level schemes, and social policy initiatives such as community service obligations. Electricity ombudsman schemes operate in some jurisdictions such as Queensland, New South Wales and South Australia.20

Pricing and reliability issues In 2012 the Senate Select Committee on Electricity Prices conducted an inquiry to identify the ‘key causes of electricity price increases over recent years and those likely in the future’.21 The Select Committee report set the scene for the inquiry as follows:

Australian household electricity prices remained relatively constant in real terms between 1991 and 2007 … From 2008 onwards, household electricity prices have risen rapidly, with an average national rise of around 40 per cent in real terms over the last three years. Price increases have varied between states and territories, however, all have experienced a significant rise in prices since 2007 … The Australian Bureau of Statistics (ABS) reported that the proportion of real household expenditure on energy is at the same level as a decade ago. Rather, it is the rapid increase that has occurred in recent years that is causing consumer pain. This spike is due to a period of catch-up following prolonged under-investment combined with increased reliability standards.

22

It was reported that in real terms, prices for households increased on average by 72 per cent for electricity in the ten years to June 2013.23 The pattern of price increases over the ten years to

16. Independent Competition and Regulatory Commission (ICRC), ‘About us’, ICRC website. 17. AER, ‘AER approves 2019-20 network tariffs for Power and Water’, AER website, issued 14 June 2019. 18. Western Australian Government (WA Government), ‘Household electricity pricing’, WA Government website, page reviewed 4 September 2019.

19. Department of the Environment and Energy (DEE), ‘National Energy Customer Framework’, DEE Energy website. 20. Energy and Water Ombudsman Queensland (EWOQ), EWOQ website; Energy and Water Ombudsman NSW (EWON), ‘About us’, EWON website; Energy and Water Ombudsman SA (EWOSA), EWOSA website. 21. The terms of reference, submissions and oral evidence to the Senate Select Committee, the Committee’s final report and the

Government response to the report are available on the inquiry homepage. 22. Senate Select Committee on Electricity Prices, Reducing energy bills and improving efficiency, The Senate, Canberra, November 2012, p. 17. 23. K Swoboda, ‘Energy prices: the story behind rising costs’, Briefing book: key issues for the 44th Parliament, Parliamentary

Library, Canberra, December 2013, pp. 106-107.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 9

June 2013 differed across states and territories. In real terms, the rate of increase for electricity was 30 per cent in Perth, 41 per cent in Adelaide, 73 per cent in Brisbane and 107 per cent in Sydney.24

Throughout 2015 and 2016 concern about the price of electricity grew in both the domestic and business sector. There were reports that Australian households were ‘paying far more than people in comparable countries in electricity network charges, with huge discrepancies across different states’.25 These claims were made in an environment where there was considerable criticism that price rises were the result of Government owned infrastructure being ‘gold plated’ at taxpayers’ expense prior to being privatised.26

In South Australia, in particular, businesses expressed dismay that prices for electricity in 2017 and 2018 were twice the price per megawatt hour in Victoria. BHP Billiton stated that ‘security and reliability of power, as well as prices increased for electricity in the forward market are areas of concern for Olympic Dam’.27 Some of those concerns arose due to the energy market transitioning to renewable energy sources such as wind and solar power with the outcome being a less stable base load.28 However, rises in wholesale prices in South Australia are the result of a combination of state-specific factors and broader policies. These include:

• the high share of wind energy in electricity generation that displaces other sources of generation when conditions are favourable

• a reliance on two capacity-constrained interconnections with Victoria to import and export electricity

• the closure of uneconomic, older, higher-cost fossil fuel generation as demand remains flat and renewable generation capacity has been added and

• the historically wider use of gas-fired generation in the state and the impact on liquid natural gas (LNG) export-related higher gas prices.29

The pressure in the electricity market increased with the announcement that Victoria’s Hazelwood power station would be shut. 30 The shutdown occurred on 29 March 2017. The AER subsequently reported to the Treasurer:

… the exit of Hazelwood removed a significant low fuel cost generator, which was largely replaced by higher cost black coal and gas plant—at a time when the input costs of black coal and gas plant were increasing. These factors, in turn, drove significant increases in wholesale electricity prices. We found no evidence to suggest that prices were being driven by rebidding close to dispatch, or physical or economic withholding—behaviours more usually associated with the exercise of market power.

31

24. Ibid.

25. G Hutchens, ‘Australians gouged for electricity access’, The Sydney Morning Herald, 11 February 2015, p. 4; see also Editorial, ‘Electricity bills tipped to double’, The Australian, 8 September 2015, p. 2. 26. P Murray, ‘Nahan must pull plug on bill subsidy’, The Weekend West, 21 March 2015, p. 29; Editorial, ‘Queensland does not show that reform is impossible’, The Australian, 3 February 2015, p. 13. 27. B Potter and S Evans, ‘SA business fears years of high costs’, The Australian Financial Review, 2 March 2016, p. 7; See also

M Owen, ‘BHP leads business charge for lower electricity prices’, The Australian, 9 November 2016, p. 6. 28. A White, ‘Don’t let a good crisis go to waste: Frydenberg must create a truly national energy market’, The Weekend Australian, 23 July 2016, p. 25; P Hannam, ‘Electricity retailer trio accused of price gouging’, The Sydney Morning Herald,

16 August 2016, p. 2. 29. K Swoboda, ‘Energy market challenges’, Briefing book: key issues for the 45th Parliament, Parliamentary Library, Canberra, August 2016, pp. 124-127. 30. D McConnell, ‘Hazelwood closure: what it means for electricity prices and blackouts’, The Conversation, 29 March 2017;

P Williams, ‘Warning on energy price volatility’, The Age, 30 March 2017, p. 6. 31. AER, ‘AER electricity wholesale performance monitoring—Hazelwood advice’, AER website, March 2018.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 10

Electricity supply and prices inquiry On 27 March 2017 the Government directed the Australian Competition and Consumer Commission (ACCC)32 to hold an inquiry into the supply of retail electricity and the competitiveness of retail electricity prices.33 The rationale for the inquiry was:

Competition in retail electricity markets should mean lower prices for residential and business consumers. However, retail electricity markets don’t appear to be operating as effectively as they could …

Recent work by a number of organisations - including the Australian Energy Market Commission, Energy Consumers Australia and the Grattan Institute - has highlighted significant concern about the causes of recent electricity price increases on the East Coast. Submissions to the COAG’s review into energy markets, chaired by Dr Alan Finkel, have highlighted similar concerns.

34

The ACCC made its final report (the Electricity Report) to the Government on 11 July 2018.35 The Electricity Report contained 56 recommendations directed towards:

• boosting competition in generation and retail markets

• lowering supply chain costs

• improving consumer experiences and outcomes and

• the business experience.36

The Government subsequently announced that it was ‘backing the ACCC to drive lower electricity prices for households and small business … [and would be] implementing a number of key recommendations from the ACCC inquiry’.37

In addition it was stated:

The ACCC will prepare ongoing reports (at least six-monthly) and identify any cases where outcomes are unacceptable. Businesses will have the opportunity to explain and rectify issues raised by the ACCC. Where issues are not resolved, the ACCC will have the power to recommend a proportional and targeted response for the Treasurer’s determination.

The range of enforcement remedies and responses that could be applied if the ACCC identifies problems would include:

 A public warning notice issued by the Treasurer or ACCC

 A court enforceable undertaking, as currently used by the ACCC in other contexts

 Converting the default market offer into a binding cap price

32. Section 4 of the CCA defines the term Commission as the Australian Competition and Consumer Commission established by section 6A of that Act and includes a member of the Commission or a Division of the Commission performing functions of the Commission. For the purposes of this Bills Digest, references to the ACCC are substituted for references in the Bill to Commission.

33. M Turnbull (Prime Minister) and S Morrison (Treasurer), ACCC to review electricity prices, joint media release, 27 March 2017. 34. Ibid. 35. Australian Competition and Consumer Commission (ACCC), ‘Electricity supply and prices inquiry’, ACCC website. 36. ACCC, Restoring electricity affordability and Australia’s competitive advantage, Final report, ACCC, Canberra, June 2018,

pp. xvii-xxv. 37. S Morrison (Prime Minister) and J Frydenberg (Minister for Environment and Energy), Driving power prices down, joint media release, 20 August 2018.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 11

 Tightening guidelines for how the AER sets the default market offer to further drive down the default electricity price

 Fines and other financial penalties

 Extending market making obligations beyond South Australia, which is a form of structural separation and

 Ordering divestiture of assets or parts of an energy business (as a last resort). 38 [emphasis

added]

Fair deal on energy policy The commitment to act on the recommendations in the Electricity Report was translated into policy in October 2018. The ‘fair deal on energy’ policy included, amongst other things, a commitment to increase the regulator’s power to crack down on anti-competitive practices through ‘structural separation and divesture’.39

To that end, a consultation paper, Electricity Price Monitoring and Response Legislative Framework, was circulated for public comment by 7 November 2018.40 Copies of submissions to Treasury in response to the consultation paper have not been made available on the Treasury website.

As stated above, this Bill is an updated version of the first Bill. It contains some alterations which respond to concerns expressed by stakeholders with respect to the first Bill.

The remedies and other measures in the Bill only apply to the electricity sector.

Committee consideration

Senate Standing Committee on Economics The Bill was referred to the Senate Standing Committee on Economics (Economics Committee) for inquiry and report by 7 November 2019.41 The Economics Committee received 19 submissions. At the time of writing this Bills Digest, the Economics Committee had not published its report.

Importantly, the first Bill was referred to the Economics Committee for inquiry and report.42 The Economics Committee received 33 submissions in response to its inquiry. The report of the Economics Committee acknowledged stakeholder concerns regarding the severity of the contracting and court-ordered divestiture powers proposed by the Bill, as well as the risks that such regulatory powers present with regard to investor confidence.43 Nevertheless, the majority report of the Economics Committee recommended that the first Bill be passed.44

38. Ibid. 39. S Morrison (Prime Minister), J Frydenberg (Treasurer) and A Taylor (Minister for Energy), A fair deal on energy, joint media release, 23 October 2018. 40. Treasury, Electricity price monitoring and response legislative framework, Consultation paper, 23 October 2018. 41. The terms of reference for the inquiry, submissions to the Senate Standing Committee on Economics and the final report

(when published) are on the inquiry homepage. 42. The terms of reference for the inquiry, submissions to the Senate Standing Committee on Economics and the final report are on the inquiry homepage. 43. Senate Economics Legislation Committee, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018

[Provisions], Senate, Canberra, 18 March 2019, p. 42. 44. Ibid., p. 43.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 12

As many of the submitters to the Economics Committee in relation to this Bill annexed their earlier submissions for consideration, the stakeholder comments in this Bills Digest cover both submissions to the first Bill and this Bill where relevant.

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) commented on the amendments in Schedule 2 to the first Bill.45 The comments were canvassed in the Bills Digest for the first Bill.46

However, the Scrutiny of Bills Committee had no comments in relation to the current Bill.47

Policy position of non-government parties/independents

Australian Labor Party Australian Labor Party (Labor) Members and Senators expressed significant concerns about the first Bill.48 However, Labor Member Mark Butler has stated that, ‘subject to support by the government for a number of amendments … the Opposition will in a constructive way be supporting this legislation’.49 The amendments related to:

• the capability of a divestiture order to downgrade the level of public ownership of an existing electricity asset in states such as Queensland, Western Australia and Tasmania

• the transmission of business provisions in the Fair Work Act 2009 do not cover a transmission that is caused by a forcible divestiture50 and

• the need for a review within four years of the effectiveness of the amendments in the Bill.51

The amendments were passed in the House of Representatives and will be included in the form of the Bill which is to be considered by the Senate.52

Australian Greens According to Adam Bandt of the Australian Greens (the Greens) the Bill does not address the real problem faced by Australians today:

We are not on track to stop dangerous global warming, and this government does not have global warming under control. Farmers who are living through record drought know that this government doesn't have global warming under control. People who live in towns where they are being told to expect water to be trucked in because they might run out of it know the government doesn't have global warming under control. The 400,000 signatories to the largest-ever electronic petition in this place know that the government doesn't have global warming under control, and they want it to declare a climate emergency. The people from all walks of life who are marching in the street know that the

45. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 1, 2019, The Senate, 13 February 2019, pp. 20-21. 46. Mills and Pyburne, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018, op. cit. 47. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 7, 2019, The Senate, 16 October 2019,

p. 42.

48. Australian Labor Party (Labor) Senators, Dissenting report, Senate Standing Economics Legislation Committee, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 [Provisions], The Senate, Canberra, 2019, p. 45. 49. M Butler, ‘Second reading speech: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of Representatives, Debates, (proof), 22 October 2019, p. 50. 50. Fair Work Act, subsections 311(1)-(3) and 786AD(1) and (2). 51. Butler, ‘Second reading speech: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, op. cit. 52. M Butler, ‘Consideration in detail: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of

Representatives, Debates, (proof), 23 October 2019, p. 20.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 13

government doesn't have global warming under control. What they are all begging for from this government is a plan to bring down pollution and address the crisis in global warming and the climate emergency, but also address the crisis in the energy system, which the government has broken. 53

Independents Dr Helen Haines, Independent Member for Indi, has stated that she has ‘deep reservations about the Bill’.54

According to the Grattan Institute, retail electricity companies have significantly higher margins than other industries and it's well established that they gouge customers…

But what concerns me about this bill is not only that it might fail to address the real problems in the electricity sector but also that it might threaten investment in new energy infrastructure in our regions …

In my electorate, renewables are jobs. By introducing an extraordinary power that has never existed in this country before, the government risks scaring off investment in a crucial industry for regional communities. 55

Position of major interest groups

Industry groups Industry groups have rejected the provisions of the Bill that provide for the Treasurer to make contracting orders and for the courts to order divestment of assets on the grounds that ‘the legislation will push up prices, delay investment and weaken security of the grid’.56

The Australian Energy Council has stated:

Despite the availability of reasonable and logical amendments, the Government has only made a small number of changes largely immaterial to its operation, preferring to focus on the procedural requirements in the Bill.

A number of these procedural amendments are supported, but they will not mitigate the significant risks this Bill creates. The weight of evidence presented by credible experts that this Bill would have unintended and undesirable consequences has been ignored. 57

AGL expressed the view in its submission on the first Bill:

… the legislative framework that is proposed … presents a significant risk to investment in the energy market. The proposed framework outlines legislative provisions that are unnecessary, uncertain in their operation and impose extremely interventionist and disproportionate consequences, with vertically integrated retailers likely to be the most significantly impacted by the threat of divestment.

58

53. A Bandt, ‘Second reading speech: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of Representatives, Debates, (proof), 22 October 2019, p. 55. 54. H Haines, ‘Second reading speech: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of Representatives, Debates, (proof), 22 October 2019, p. 64. 55. Ibid. 56. P Williams, ‘Energy plan “will increase risk, prices”’, The Australian, 29 January 2019, p. 15. 57. Australian Energy Council, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 11], 3 October 2019, p. 2. 58. AGL, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 13], 4 October 2019, which annexed the earlier submission of

25 January 2019. See also Williams, ‘Energy plan “will increase risk, prices”’, op. cit.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 14

Consumers The Consumer Action Law Centre gave its support to ‘the proposed prohibitions in the Bill which allow the ACCC to take action where price monitoring demonstrates retail, financial contracting or wholesale price outcomes that are not aligned with competitive market outcomes’.59

Unions According to the Electrical Trades Union of Australia (ETU):

The forced divestiture arrangements will have one of two effects. Either they will require public owned assets to be divested to private enterprise or they will force one public owned asset to be transferred into another public owned entity.

In the former case, what we see is the creation of a boutique regulatory power, which doesn’t exist in any other industry, that will force a State or Territory Government to divest its public owned assets to a private provider. The legislation is completely opaque in detailing which overseas owned private corporation will then get its hands on our monopoly assets, if it will pay for it and if so how much, who it will pay and what arrangements are made for the employees associated with the divestment. Indeed, there is no requirement whatsoever for the acquirer to accept any transfer of employees as a result of the divestiture.

60

Financial implications According to the Explanatory Memorandum to the Bill, the amendments will not have any financial impact.61

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.62

Parliamentary Joint Committee on Human Rights At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not commented on the Bill. The Committee considered that the first Bill did not raise human rights concerns.63

Key issues and provisions

Schedule 1—key issues and provisions The Bill inserts proposed Part XICA—The Electricity Industry into the CCA.64

59. Consumer Action Law Centre, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 3], 3 October 2019, p. 2. 60. Electrical Trades Union of Australia (ETU), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 17], 8 October 2019, p. 3. 61. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, pp. 3-4. 62. The Statement of Compatibility with Human Rights can be found at pages 109-111 of the Explanatory Memorandum to the

Bill.

63. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 1, 2019, 12 February 2019, p. 68. 64. Item 1 of Schedule 1 to the Bill.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 15

The Bill uses the terms body corporate and corporation. A body corporate is an incorporated legal entity created and recognised by the law, for example an association, company, government agency or institution identified by a particular name. A corporation is one type of body corporate.

A corporation is a firm that meets certain legal requirements. A corporation has three characteristics:  it has a legal existence—that is, a corporation can buy, sell, own, enter into a contract and sue other persons and corporations, and be sued by them. It can commit an offence and be

punished  it has limited liability—that is, a corporation and its shareholders are limited in their liability to creditors only up to the resources of the corporation  it has continuity of existence—that is, a corporation can live beyond the life spans and

capacity of its management and shareholders because its ownership can be transferred through a sale or gift of its shares.

The term corporation is defined in section 4 of the CCA as a body corporate that:  is a foreign corporation65  is a trading corporation formed within the limits of Australia or is a financial corporation so formed66

 is incorporated in a Territory or  is the holding company of a body corporate of a kind referred to in the paragraphs above.67

Application to corporations New Part XICA applies to a corporation and to a connected body corporate. According to the Explanatory Memorandum to the Bill:

Electricity businesses are typically carried on by corporate groups. For example, vertically integrated electricity businesses (those that operate in the wholesale, financial contract and retail markets) will be carried on by corporate groups where various companies in that group (often a large number) carry on various functions or hold various assets necessary for the conduct of the business.

68

The Bill recognises that a corporation within a corporate group may engage in conduct that is prohibited conduct. In doing so, it may deal with, or use assets held by, other companies in the same group. To that end, proposed subsection 153D of the CCA introduces the concept of a connected body corporate. There are three categories.

The first category of connected body corporate arises where a corporation of itself engages in prohibited conduct.69

65. CCA, section 4 defines a foreign corporation as a foreign corporation within the meaning of section 51(xx) of the Constitution and includes a body corporate that is incorporated in an external Territory. 66. CCA, section 4 defines a trading corporation as a trading corporation within the meaning of section 51(xx) of the Constitution. 67. CCA, subsection 4A(4). A holding company, in relation to a body corporate, means a body corporate of which the first body

corporate is a subsidiary. 68. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 33. 69. CCA, proposed subsection 153D(1).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 16

The second category of connected body corporate arises from the provisions of subsection 4A(5) of the CCA. That subsection deems that where a body corporate is the holding company of another body corporate, a subsidiary of another body corporate or a subsidiary of the holding company of another body corporate, then the body corporates are related to each other. A body corporate is a connected body corporate in relation to the prohibited conduct of a corporation if it is a related corporation and the prohibited conduct involves either:

• the direct or indirect use of assets held by the body corporate or

• direct or indirect dealings between the body corporate and the corporation.70

A body corporate covered by this category does not need to be a corporation as defined in the CCA.71

The third category of connected body corporate arises where a body corporate is a holding company of another body corporate and the other body corporate is a connected body corporate in relation to the prohibited conduct.

How the electricity market works The NEM wholesale market is where generators sell electricity and retailers buy electricity. Retailers then resell electricity to businesses and householders. There are around 30 retailers and over 100 generation companies in the NEM wholesale market.72

There are two ways to buy and sell electricity in the NEM wholesale market:

• through the spot market and

• through the contract market.73

About the spot market The AEMC describes the operation of the spot market as follows:

The spot market is the mechanism that AEMO uses to match the supply of electricity from power stations with real time consumption by households and businesses. All electricity in the spot market is bought and sold at the spot price. The spot price tells generators how much electricity the market needs at any moment in time…

When the spot price is increasing, generators ramp up their output or more expensive generators turn on to sell extra power to the market … When the spot price is decreasing, more expensive generators turn down or off. 74

Spot prices are currently updated every thirty minutes but this will move to every five minutes in 2021. Prices are usually low in the early hours of the morning. Spot prices are usually higher in the mid-afternoon or evening, when people and businesses are generally using the most power.75

70. CCA, proposed subsection 153D(2). 71. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 34. 72. AEMC, ‘Spot and contract markets’, AEMC website. 73. Ibid. 74. Ibid. 75. Ibid.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 17

About the contract market In order to manage their financial risks and have more certainty over wholesale energy costs, retailers enter into various wholesale hedging contracts. These contracts fix the wholesale price that retailers pay for electricity over the course of a year, or several years. This reduces retailers’ exposure to the highs and lows of the spot market and smooths out their costs.76

As well as dealing with wholesale costs as set out above, electricity retailers are subject to additional costs such as:

• network costs—being the costs charged by transmission and distribution network operators and

• environmental costs—that is, the costs of complying with environmental schemes.77

Prohibited conduct type 1: retail pricing

The provisions related to prohibited conduct in retail pricing are not the same as in the first Bill. Proposed subsections 153E(2) and (3) have been added. They are explained below. The Bill sets out the types of conduct which are prohibited conduct in the electricity market. There are four types of prohibited conduct.

For ease of understanding, this Bills Digest numbers the prohibited conduct types 1-4. However, it should be noted that the Bill does not refer to the prohibited conduct in this manner.

The first and simplest of these applies to a corporation that offers to supply, or supplies, electricity to a small customer.78

A small customer is a residential customer or a small business customer. A residential customer is a customer who purchases, or proposes to purchase electricity principally for personal, household or domestic use at premises.79 A small business customer is a customer who purchases, or proposes to purchase, electricity at a rate less than 100 MWh a financial year and is not a residential customer in relation to that electricity.80 The prohibited conduct is a failure to make reasonable adjustments to the price of supplies (or offers to supply) to reflect sustained and substantial reductions in the corporation’s cost of procuring electricity.81 According to the Explanatory Memorandum to the Bill this rule is ‘aimed at ensuring that reductions in supply chain costs for the particular retailer’ are ‘passed on to the retailer’s residential and small business customers’.82

This type of prohibited conduct which is aimed at retailers may be remedied by the ACCC issuing a public warning notice or an infringement notice.

76. Ibid. 77. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 15. 78. CCA, proposed paragraph 153E(1)(a). 79. CCA, proposed section 153C. 80. CCA, proposed section 153C. 81. CCA, proposed subsection 153E(1). 82. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 13.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 18

Exceptions Proposed subsections 153E(2) and (3) set out exceptions to the general rule so that a corporation does not contravene the prohibition if:

• the price is a standing offer price (as set out in the Competition and Consumer (Industry Code— Electricity Retail) Regulations 2019 (Industry Code—Electricity Retail Regulations) or

• the adjustments would contravene an Act of the Commonwealth, a state or territory or an instrument made under such an Act.83

The Industry Code—Electricity Retail Regulations were enacted in response to a recommendation by the ACCC that the AER be given power to set maximum standing offer prices for electricity supplied to small customers. It also recommended that electricity retailers be required to discount all their offers from a reference price set by the AER.84

The Industry Code—Electricity Retail Regulations commenced on 5 April 2019. Part 2 of the Regulations prescribes a mandatory industry code for the purposes of Part IVB of the CCA:

Under the code, standing offer prices must not exceed a price determined by the AER, small customers must be told how a retailer’s prices compare with the AER-determined price, the most prominent price-related feature in an advertisement must not be a conditional discount; and any conditions on other discounts must be clearly displayed.

85 [emphasis added]

A breach of a mandatory industry code is a breach of section 51ACB (in Part IVB) of the CCA. The remedies available for a breach of the Code include issuing infringement notices,86 injunctions,87 damages88 and other remedial orders,89 including third party redress.90 The ACCC, which enforces compliance with the Code, can issue a public warning notice for likely breaches of the Code91 or use its random audit power to inspect documents or records required to be kept pursuant to a prescribed industry code.92

Key issue—reasonable adjustments The issue to be determined is how to measure whether a retailer has made reasonable adjustments to the price of offer to supply or actual supplies of electricity to small customers that reflect sustained and substantial reductions in their costs. These terms are not defined in the Bill. According to the Explanatory Memorandum to the Bill, ‘it will be necessary to have regard to all the relevant facts and circumstances’ of the relevant retailer.93

83. For example, Power and Water Corporation—Determination 2019-24 (NT). 84. Explanatory Statement, Competition and Consumer (Industry Code—Electricity Retail) Regulations 2019. 85. Ibid. 86. CCA, section 53ACD. 87. CCA, section 80. 88. CCA, section 82. 89. CCA, section 86C. 90. CCA, section 51ADB. 91. CCA, section 51ADA. 92. CCA, section 51ADD. 93. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 16.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 19

The Grattan Institute noted that ‘the ACCC did not identify failure to pass on cost reductions to small customers as a major cause of high prices. Nevertheless, the Bill’s first target is failure to pass through cost reductions’.94

The Law Council of Australia (LCA) was particularly critical of proposed section 153E stating:

… the combination of the prohibition in section 153E together with the exceptions for regulated price offers means that:

a) retailers are permitted to price offers at the regulated price; but

b) are required, if the offer is a market offer, to adjust that offer if there is a substantial and sustained decrease in procurement costs. 95

The LCA expressed its concerns as follows:

a) first, the definition of prohibited conduct … is vague and subjective and does not reflect any established body of legal or economic principle; and

b) secondly, the practical operation of section 153E(1) in addition to regulated price offers results in significant and potentially onerous regulation of prices otherwise set by competitive processes. 96

Australian Industry Group also raised concerns about section 153E:

The retail element creates complex new concepts that would be difficult to establish either way, including what the ‘underlying cost of procuring electricity’ is and whether a downward movement in that cost is ‘sustained and substantial’. 97

Prohibited conduct type 2: electricity financial contract liquidity The second type of prohibited conduct is set out in proposed section 153F of the CCA. It applies to a corporation which generates electricity and to a body corporate that is related to the corporation which generates electricity.

The relevant conduct occurs where the corporation:

• fails to offer electricity financial contracts

• limits or restricts its offers to enter into electricity financial contracts or

• offers to enter into electricity financial contracts in a way that has the effect (or likely) effect of preventing, limiting or restricting acceptance of those offers.98

Proposed section 153C of the CCA provides that a contract is an electricity financial contract if:

• rights under the contract are derived from, or relate to, the price of electricity on an electricity spot market and

• the operator of that electricity spot market is not a party to the contract.

94. Grattan Institute, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 7], October 2019, p. 4. 95. Law Council of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 16], 8 October 2019, p. 1. 96. Ibid. 97. Australian Industry Group, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 15], 8 October 2019, p. 2. 98. CCA, proposed paragraph 153F(b).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 20

The conduct will not be prohibited conduct unless it was undertaken for the purpose99 of substantially lessening competition in any electricity market.100

Why liquidity is important The AER does not regulate the electricity derivatives markets—rather it monitors the markets because they have significant links with wholesale and retail activity. According to the AER:

Levels of contracting and forward prices in the financial markets can, for example, affect generator bidding in the NEM. Similarly, financial markets can influence retail competition by providing a means for new entrants to manage price risk. More generally, the markets create price signals for energy infrastructure investors and provide a means to secure the future earnings streams needed to underpin investment.

101

The AER State of the Energy Market report for 2009 explains the importance of liquidity:

The effectiveness of financial markets in providing risk management services depends on the extent to which they offer the products that market participants require. Adequate market liquidity is critical. In electricity financial markets, liquidity relates to the ability of participants to transact a standard order within a reasonable timeframe to manage their load and price risk, using reliable quoted prices that are resilient to large orders, and with sufficient market participants and trading volumes to ensure low transaction costs.

102

This is particularly relevant in the context of the ACCC’s comment in the Electricity Report:

In generation … the Queensland and New South Wales (NSW) governments made decisions regarding the operation and ownership of generation assets giving rise to concentrated markets. In Queensland, the government consolidated the generation assets of three businesses into two. In NSW, as one example, both generators owned by Macquarie Generation were sold to AGL, missing an opportunity to deliver a competitive market structure by selling them to separate buyers.

103 [emphasis added]

Key issue—substantially lessening competition The issue to be determined is how to measure whether a generator of electricity has offered (or failed to offer) electricity financial contracts for the purpose of substantially lessening competition in any electricity market.104

The phrase ‘substantially lessening competition’ is a seemingly simple phrase but it imports complex economic principles involving much more than a literal interpretation of each of its terms. In essence, the phrase means that conduct will only contravene the CCA if, in any relevant market, it has a meaningfully adverse impact on the competitive process in that market (rather than on specific competitors), taking more than a short-term view and having regard to barriers to entry.105

99. The term purpose means nothing more than the practical effect sought to be achieved—the end in view. Source: News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563, [2003] HCA 45, paragraph 192. 100. CCA, proposed paragraph 153F(c). 101. AER, State of the energy market 2009, Melbourne, 2009, p. 90. 102. Ibid., p. 96. 103. ACCC, Restoring electricity affordability and Australia’s competitive advantage, Final report, Canberra, June 2018, p. v. 104. CCA, section 4G provides that references in the Act to lessening of competition are to be read as including references to

preventing or hindering competition. 105. RV Miller, Miller’s Australian competition and consumer law annotated, 41st edn, Lawbook Co., Sydney, 2019, p. 369.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 21

In assessing whether the conduct has, or is likely to, result in a substantial lessening of competition, a counterfactual test is applied. That requires the court to consider the state of competition in the relevant market both with and without the conduct.106

Given that sections 46 and 47 of the CCA (which relate to misuse of market power and exclusive dealing respectively) already deal with competition issues, some stakeholders indicated their view that the Bill does not add any further benefit or accountability than is already in place.107

The Business Council of Australia:

… considers that the purpose of section 153F—that is, to prevent generators from using their market position to deliberately reduce competition and liquidity by withholding financial contracts—would be best achieved by building upon the existing misuse of market power provisions in the CCA (which have been judicially tested and have a proven track record in achieving their policy purpose) by linking them with new 'Big Stick' penalties where the behaviour arises in the energy sector. In this way the energy industry would be visibly exposed to harsher penalties for engaging in this type of behaviour, Government would be better equipped to enforce these penalties, and industry would have certainty as to its obligations. It is also straightforward from a drafting perspective.

108

This type of prohibited conduct which is aimed at generators and gentailors may be remedied by the ACCC issuing a public warning notice or an infringement notice.109

The LCA notes:

The intended target for the prohibition in section 153F appears to be large ‘gentailers’, but it is not difficult to see its possible use to prosecute small electricity retailers, given the subjectivity and lack of precision of the drafting. This would not be a desirable outcome, as it could make retailing less competitive than would otherwise be the case.

110

In addition, the Bill allows the ACCC to escalate its enforcement by commencing a process which may end with the Treasurer issuing a contracting order. (A discussion about these remedies is below.)

Prohibited conduct type 3: electricity spot market (basic case) The third type of prohibited conduct arises where a corporation bids or offers (or fails to bid or offer) to supply electricity in relation to an electricity spot market (see the discussion of what constitutes the spot market above). This prohibition is directed towards the wholesale market.111

The conduct will be prohibited conduct if the corporation did so:

• fraudulently, dishonestly or in bad faith or

• for the purpose of distorting or manipulating prices in that electricity spot market.112

106. Ibid. 107. Australian Energy Council, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, op. cit., pp. 4-5. 108. Business Council of Australia (BCA), Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury

Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018, [Submission no. 9], 3 October 2019, p. 4. 109. Gentailors are vertically integrated businesses operating as both a generator and retailer. Source: Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 15. 110. Law Council of Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Prohibiting Energy Market Misconduct) Bill 2019, op. cit., p. 3. 111. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 27. 112. CCA, proposed section 153G.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 22

Key issue—identifying the prohibited conduct The requirement that conduct not be fraudulent, dishonest or in bad faith is in equivalent terms to Rule 542 of the National Gas Rules which are made by the AEMC under the National Gas Law.113 These terms are not defined in the Bill. However, the Explanatory Memorandum to the Bill states:

… a corporation would act fraudulently, dishonestly or in bad faith where its conduct was aimed at obtaining a financial or competitive advantage by unlawful or unfair means, involved wrongdoing or was not otherwise of a kind that would be expected of a person acting according to the standards of a reasonable and honest person. Its meaning is necessarily derived from the context in which it is used in the Bill, that is, of conduct in relation to an electricity spot market.

114

Similarly the Explanatory Memorandum gives this description of distorting or manipulating prices:

A corporation would act for the purpose of distorting or manipulating prices in an electricity spot market where its conduct seeks to undermine the process by which market participants would reasonably expect prices to be determined in a market characterised by effective competition. 115

And further:

The analysis of whether prices have been distorted or manipulated must distinguish between behaviour which seeks to take advantage of higher prices (which is permissible under the design of the spot market), and behaviour which seeks to cause higher prices through means that are not acceptable features of an electricity spot market.

Given the complexity of the market, it is not possible to exhaustively prescribe the conduct which will and will not have the purpose of distorting or manipulating prices. This depends on the specific facts of the case. 116

Stakeholder comments The submission by the Australian Energy Council which annexes comments by Ashurst outlining proposed amendments to the Bill states:

The words "distorting" and "manipulating" without further definition and clear guidance are capable of multiple meanings and are difficult to practically apply in the context of an energy-only market, in which prices are intended to change constantly to reflect the prevailing circumstances of the market.

The market design is premised on individual participants making interval-by-interval decisions based on a host of factors, while properly pursuing the commercial objective to achieve an economic return over the longer term. Accordingly, it must be made clear that these prohibitions are not intended to prohibit bidding conduct that is consistent with market design and the necessity for higher prices at a time of tight supply and demand as a signal for further market investment. The prohibitions may be difficult to interpret and enforce, with the potential for considerable argument about the measures of these words.

117

AGL explains its concerns with the spot market prohibition as follows:

113. AEMC, National Gas Rules version 50, AEMC website, commenced 1 October 2019; the National Gas Law is located in Part 2 of the National Gas (South Australia) Act 2008 (SA). 114. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 29. 115. Ibid. 116. Ibid., p. 30. 117. Australian Energy Council, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws

Amendment (Prohibiting Energy Market Misconduct) Bill 2019, op. cit., pp. 6-7 of the Ashurst Annexure.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 23

The basic design and function of the NEM, which employs an auction-based clearing mechanism, results in effectively all bids (or withheld bids) impacting the spot price in the market. Further, high prices in the spot market are intended to legitimately provide signals for investment in new capacity. It is unclear how the prohibitions will clearly draw a line between legitimate bidding (or not bidding), which is central to the design of the electricity market, and prohibited conduct.

118

This type of prohibited conduct which is aimed at wholesalers may be remedied by the ACCC in the same way as for the first type of prohibited conduct by retailers. More serious remedies such as a contracting order or divestiture order are not available. (A discussion about these remedies is below.)

Prohibited conduct type 4: electricity spot market (aggravated case)

About gaming The Grattan Institute published a report entitled Mostly Working: Australia’s Wholesale Electricity Market in 2018. That report explains the problem of ‘gaming’ as follows:

Price fluctuations added more than $800 million to the total value traded in the wholesale spot market in 2017 … In Queensland and South Australia, large price fluctuations within half-hour settlement periods have increased wholesale prices by around 10 per cent each year since 2013.

When a generator is suddenly unavailable, generators need to be able to ‘rebid’. But rebidding also enables generators to change their offer at the last minute, which can cause big price fluctuations. Particularly in Queensland and South Australia, prices sometimes jump from less than $100 per megawatt hour to more than $14,000 per megawatt hour and back again within a half-hour period. This occurs even when demand is not particularly high. These price fluctuations are less frequent in NSW and Victoria, where there is more competitive pressure from multiple interconnectors and local generation.

Some of this ‘gaming’ may be justified by genuine supply constraints. But external constraints—such as a generator outage—often last longer than five minutes in a half hour. And most of the time the system is flexible: its [sic] responds to changing conditions with little change in price. 119

The fourth type of prohibited conduct arises where a corporation bids or offers (or fails to bid or offer) to supply electricity in relation to an electricity spot market.

The conduct will be prohibited conduct if the corporation did so fraudulently, dishonestly or in bad faith, for the purpose of distorting or manipulating prices in that electricity spot market.120

This type of prohibited conduct which is aimed at wholesalers is considered to be the most egregious. In that case, the more serious remedies of contracting order or divestiture order are available. (A discussion about these remedies is below.)

Purpose For all but prohibited conduct type 1, a corporation may be deemed to have done something:

• for the purpose of substantially lessening competition in an electricity market or

• for the purpose of distorting or manipulating prices in an electricity spot market

118. AGL, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, op. cit., p. 2. 119. Grattan Institute, Mostly working: Australia’s wholesale electricity market, 1 July 2018, p. 24. 120. CCA, proposed section 153H.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 24

even if the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.121

The position of the Business Council of Australia (BCA) is that there is no need for section 153J to be included because the principle of ascertaining purpose by inference exists as a matter of general law:

In determining whether certain conduct has the 'purpose of substantially lessening competition', while the courts have found that it is the subjective purpose of the parties that is relevant (ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460), they have confirmed that subjective purpose can be inferred from the surrounding circumstances (Universal Music Australia Pty Ltd v ACCC [2003] FCAFC 193).

122

Similarly Energy Australia ‘considers it to be entirely inappropriate that a corporation’s purpose can be inferred, and possibly penalties applied, that is potentially inconsistent with the evidence presented’.123

Remedies The Bill sets out a range of remedies that are to be applied in relation to the four types of prohibited conduct set out above. These include:

• for the ACCC in respect of any of the prohibited conduct:

- issuing a public warning notice or - issuing an infringement notice • for the Treasurer:

- applying for a divestiture order from the Federal Court—in respect of type 4 prohibited conduct only and - making a contracting order—in respect of type 2 and type 4 prohibited conduct.

ACCC and prohibited conduct Division 3 of proposed Part XICA of the CCA allows the ACCC to issue public warning notices or infringement notices.

Public warning notices Under the Bill the ACCC is empowered to issue a written notice to a corporation if it reasonably believes that:

• the corporation is engaging in or has engaged in prohibited conduct

• one or more persons has suffered detriment as a result of the prohibited conduct and

• it is in the public interest to issue the notice.124

121. CCA, proposed section 153J. 122. BCA, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, op. cit., p. 7. 123. Energy Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment

(Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 10], 3 October 2019, from the annexed Submission to the first Bill. 124. CCA, proposed subsection 153L(1).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 25

In that case, the draft warning notice must comply with certain manner and form requirements, including a statement of the nature of the prohibited conduct and the time limit for making representations to the ACCC about the matters specified in the notice.125

Where at least 21 days and not more than 90 days have passed since the giving of a draft warning notice the ACCC may publish a notice containing a warning about the prohibited conduct provided that it reasonably believes that:

• the corporation is engaging in or has engaged in prohibited conduct

• one or more persons has suffered detriment as a result of the prohibited conduct and

• it is in the public interest to issue the notice.126

The formal public warning notice must state the day on which it is issued, identify the relevant prohibited conduct and the corporation that is, or has been, engaging in that conduct.127

Stakeholder comments The LCA considers:

… a public warning notice provides [Australian Consumer Law] ACL regulators with a compliance tool that may be used to prevent or reduce the opportunity for consumer detriment by alerting consumers to the alleged conduct.

Given the very real prospect that a public warning notice issued against a corporation for any form of the prohibited conduct would have adverse consequences for that corporation’s business and commercial reputation, the Committee considers it very unlikely that … publication of a public warning notice was appropriate or in the public interest.

128

Infringement notices The Bill allows the ACCC to issue infringement notices129 in respect of all of the proposed types of prohibited conduct in the same way that it is able to issue such notices under Division 5 of Part V of the CCA130 (sections 60L-60R).131

Comment These are first line remedies. In the event that the ACCC issues a warning notice or infringement notice, it may be that the impugned conduct will be addressed at an early stage. In that case no further action may be needed. In the alternative, a pecuniary penalty may be applied. (See the discussion about pecuniary penalties below.)

However the Bill operates so that efforts to address prohibited conduct may escalate within a precise framework of preliminary steps.

125. CCA, proposed subsection 153L(2). 126. CCA, proposed section 153M. 127. CCA, proposed subsection 153M(3). 128. LCA, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting

Energy Market Misconduct) Bill 2019, [Submission no. 16], 8 October 2019, p. 5. 129. For information about infringement notices see ACCC, ‘Guidelines on the use of infringement notices’, ACCC website. 130. Part 5 of the CCA relates to the carbon tax price notification obligation. 131. CCA, proposed section 153N.

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Treasurer action—preliminary steps

Step 1: issue a prohibited conduct notice

The provisions of the Bill in relation to the preliminary steps which the Treasurer may take are slightly different from those in the first Bill in that proposed subsection 153P(5) has been amended. The ACCC may give a corporation a written notice (called a prohibited conduct notice) setting out its recommendations to remedy type 2 or type 4 prohibited conduct if it reasonably believes that:

• the corporation is engaging or has engaged in prohibited conduct and

• the making of a divestiture order by the court or a contracting order by the Treasurer is a proportionate means of preventing the corporation, or any related body corporate, from engaging in that kind of prohibited conduct in the future and

• where the recommendation is for a divestiture order:

- the making of that order will result, or is likely to result, in a benefit to the public or - if the order will result, or is likely to result in, a detriment to the public, then the benefit would, or is likely to, outweigh that detriment.132 The prohibited conduct notice must comply with specific manner and form requirements including, but not limited to, identifying the corporation, the nature of the prohibited conduct and each connected body corporate (if any) in relation to the prohibited conduct.133 In addition, the prohibited conduct notice must specify the period within which the corporation may make representations to the ACCC about the relevant conduct and the proposed recommendations.134

The period for making representations starts on the day on which the notice is given and ends 45 days after that day—or on a later day that has been allowed by the ACCC.135

The ACCC must give a copy of the notice to each body corporate identified in the notice.136

Varying or revoking a prohibited conduct notice The ACCC is empowered to vary or revoke a prohibited conduct notice that has been given to a corporation.137 Like the initial prohibited conduct notice, the variation or revocation must be in writing and satisfy certain manner and form requirements.

Where a prohibited conduct notice has been varied, it must specify the time within which the corporation may make further representations to the ACCC about the matters set out in the notice.138 The period for making representations starts on the day on which the notice is given and ends 45 days after that day—or on a later day that has been allowed by the ACCC.139

132. CCA, proposed subsection 153P(1). 133. CCA, proposed paragraph 153P(2)(c). 134. CCA, proposed paragraph 153P(2)(f). 135. CCA, proposed subsection 153P(3). 136. CCA, proposed subsection 153P(5). 137. CCA, proposed subsection 153Q(1). 138. CCA, proposed subsection 153Q(2). 139. CCA, proposed subsection 153Q(3).

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Step 2: ACCC gives notice to the Treasurer Within 45 days of the end of the period for making representations in respect of either an initial prohibited conduct notice or a subsequent variation of the notice, the ACCC must take one of two actions.140 It must give the Treasurer either:

• a prohibited conduct recommendation or

• a no Treasurer action notice.141

Prohibited conduct recommendation The ACCC may give the Treasurer a written notice (called a prohibited conduct recommendation) containing one or more recommendations for the making of a contracting order or the application by the Treasurer to the court for a divestiture order—provided that the ACCC reasonably believes:

• the corporation has engaged or is engaging, in the kind of prohibited conduct specified in the prohibited conduct notice

• that making those kinds of order in relation to the prohibited conduct is a proportionate means of preventing the corporation, or any related body corporate, from engaging in that kind of prohibited conduct in the future and

• if the order is a divestiture order:

- the order will result, or is likely to result, in a benefit to the public or - if the order will result, or is likely to result, in a detriment to the public—the benefit is likely to, outweigh that detriment.142 The prohibited conduct recommendation must satisfy certain manner and form requirements including, but not limited to, identifying the corporation, the relevant prohibited conduct and each connected body corporate (if any) in relation to the prohibited conduct.143 In addition it must contain an explanation of the reasons why the ACCC reasonably believes that the relevant requirements (outlined above) are met.144

Varying or revoking a prohibited conduct recommendation The Bill provides that the ACCC may vary or revoke a prohibited conduct recommendation, subject to qualifications.145

First the ACCC cannot make a variation or revocation later than 45 days after:

• either the day on which the ACCC made the prohibited conduct recommendation

• or the day of any previous variation.146

Second, the ACCC cannot vary or revoke a prohibited conduct recommendation if the Treasurer has made a contracting order, or has applied to the Court for a divestiture order, in relation to the prohibited conduct recommendation.147

140. The requirement does not apply where the prohibited conduct notice has been revoked. CCA, proposed subsection 153R(2). 141. CCA, proposed subsection 153R(1). 142. CCA, proposed subsection 153S(1). 143. CCA, proposed paragraph 153S(2)(c). 144. CCA, proposed paragraph 153S(2)(e). 145. CCA, proposed subsection 153T(1). 146. CCA, proposed subsection 153T(2). 147. CCA, proposed subsection 153T(3).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 28

The third qualification relates only to a variation. The ACCC cannot make a variation of a prohibited conduct recommendation unless it is satisfied of at least one of the following:

• the variation is minor or insubstantial

• the variation is reasonably necessary to address the circumstance where the corporation gave the ACCC information about the prohibited conduct notice that was false or misleading in a material particular, or the corporation failed to provide information relevant to the prohibited conduct notice that is not publicly available or

• the variation is reasonably necessary to address information that was not in existence, or that the ACCC did not have, when the prohibited conduct notice was given.148

No Treasurer action notice

The provisions of the Bill in relation to the no Treasurer action notice are slightly different from those in the first Bill in that proposed subsection 153U(3) has been amended. Where the ACCC considers that it is not appropriate to give the Treasurer a prohibited conduct recommendation, it must give the Treasurer a no Treasurer action notice in respect of the relevant prohibited conduct.149

The notice must, amongst other things, explain why the ACCC considers that a prohibited conduct recommendation is not appropriate in the circumstances.150

The ACCC must give a copy of the notice to the corporation 45 days after issuing it or on an earlier date that the ACCC and the Treasurer agree upon.151

Varying or revoking a no Treasurer action notice

The provisions of the Bill in relation to the ACCC varying or revoking the no Treasurer action notice are slightly different from those in the first Bill in that proposed subsections 153V(9) and (10) have been amended. The Bill empowers the ACCC to vary or revoke a no Treasurer action notice subject to qualifications.152

First the ACCC cannot vary or revoke a no Treasurer action notice later than 45 days after:

• either the day on which the ACCC made the no Treasurer action notice

• or the day of any previous variation.153

The second qualification relates only to a variation. The ACCC cannot vary a no Treasurer action notice unless the variation is minor or insubstantial.154

The third qualification relates only to a revocation of a no Treasurer action notice. In that case the conditions in both proposed subsections 153V(5) and (6) of the CCA must be satisfied.

148. CCA, proposed subsection 153T(4). 149. CCA, proposed subsection 153U(1). 150. CCA, proposed subsection 153U(2). 151. CCA, proposed subsection 153U(3). 152. CCA, proposed subsection 153V(1). 153. CCA, proposed subsection 153V(2). 154. CCA, proposed subsection 153V(3).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 29

The relevant condition in proposed subsection 153V(5) is that the ACCC must reasonably believe that it is appropriate to:

• give the Treasurer a prohibited conduct recommendation in respect of the prohibited conduct notice or

• give the corporation a new prohibited conduct notice to identify the relevant prohibited conduct.

The condition in proposed subsection 153V(6) is that the ACCC reasonably believes that:

• the corporation or any related body corporate gave the ACCC information in response to the prohibited conduct notice that was false or misleading in a material particular, or failed to give the ACCC information relevant to the prohibited conduct notice that is not publicly available and the revocation is reasonably necessary to address that circumstance or

• the revocation is reasonably necessary to address information that was not in existence, or that the ACCC did not have, when the prohibited conduct notice was given.

The ACCC must give a copy of a variation or revocation of a no Treasurer action notice to the Treasurer as soon as practicable after making it.155

As with the amendments to proposed subsection 153U(3), proposed subsection 153V(9) no longer requires a copy of the notice to be published. Instead, the ACCC is to give a copy of the variation or revocation to the corporation as soon as practicable after making it.156

Proposed subsection 153V(10) of the CCA applies:

• if the no Treasurer action notice has not yet been given to the corporation when the ACCC makes the variation, then the variation is not given to the corporation. Instead, the varied notice is subject to the same requirements as the original no Treasurer action notice and

• if the no Treasurer action notice has not been given to the corporation before it is revoked, then a copy of the revocation is not given to the corporation.

Contracting order in response to prohibited conduct Proposed section 153W sets out the conditions for the making of a contracting order. Importantly all the preliminary steps which are set out above must have been complied with—that is:

• a prohibited conduct notice has been given to a corporation about conduct which is prohibited under proposed section 153F (electricity financial contract liquidity) or proposed section 153H (electricity spot market (aggravated case))

• the statutory time in which the relevant corporation may make representations has elapsed and, depending on the outcome of any representations, the prohibited conduct notice has been varied or remains unchanged and

• the ACCC has given the Treasurer a prohibited conduct recommendation.

In addition, the Treasurer must be satisfied that the order is a proportionate means of preventing the relevant corporation, or any related body corporate, from engaging in that kind of prohibited conduct in the future.157

155. CCA, proposed subsection 153V(8). 156. CCA, proposed subsection 153V(9). 157. CCA, proposed paragraph 153W(f).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 30

Making a contracting order

The provisions of the Bill in relation to the Treasurer making a contracting order are slightly different from those in the first Bill in that proposed subsection 153X(7) has been amended. The Bill empowers the Treasurer to order the body corporate to make offers to enter into electricity financial contracts. The order must be in writing and comply with specified manner and form requirements. Proposed subsection 153X(3) of the CCA provides that the order must also specify the following:

• the kind of offers that the body corporate must make to enter into electricity financial contracts which may include:

- the kind of electricity financial contracts that must be offered - the price or range of prices in respect of electricity under the electricity financial contracts or a method of working out that price or that range or - the minimum number of megawatt hours of electricity to which the relevant electricity

financial contracts must relate158 • the manner in which the body corporate must make those offers

• the kind of entities to which those offers must be made

• the period or periods during which the body corporate must make those offers so that they:

- start no earlier than six months after the order is made and - end no later than three years after the order is made159 • any other matter that the Treasurer considers necessary for the order to be effective.

Unlike the first Bill, this Bill does not require the Treasurer to publish the order. Instead, proposed subsection 153X(7) requires the Treasurer to publish, by electronic or other means:

• the fact that the order has been made

• the day on which the order was made and

• the name of the body corporate.

Varying or revoking a contracting order Consistent with the other provisions in the Bill, the Treasurer may vary or revoke a contracting order in respect of a body corporate, either on the Treasurer’s own initiative or in response to an application made by the relevant body corporate.160

In addition, proposed subsection 153Y(5) requires the Treasurer to publish, by electronic or other means:

• the fact that the variation or revocation has been made

• the day on which the variation or revocation was made and

• the name of the body corporate.

158. CCA, proposed subsection 153X(4). Matters to be taken into account in determining the minimum number of megawatt hours are set out in proposed subsection 153X(5) of the CCA. 159. CCA, proposed subsection 153X(6). 160. CCA, proposed subsection 153Y(1).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 31

Enforcing contracting orders If the ACCC considers that a body corporate has failed to comply with a contracting order, it may apply to the court for an enforcement order. In that case, where the court is satisfied that the period specified in the contracting order has passed, it may make all or any of the following orders:

• an order directing the body corporate to comply with the contracting order

• if the period or periods specified in the contracting order have already passed—an order directing the body corporate to comply with the contracting order, within a new period, or periods, specified in the order

• any other order that the Court considers appropriate.161

Stakeholder comments Essentially then, the Treasurer is given a very broad power, once certain procedural steps have been taken, to make contracting orders. The range of matters that could be specified in such orders are open-ended including, as they do, ‘any other matter that the Treasurer considers necessary’. In addition, the duration of a contracting order may be for up to three years. In that time, the effect of a contracting order might be detrimental to the overall operation of the electricity market.

According to Energy Networks Australia:

… the power to require a service provider to provide a service on terms and conditions set by a Minister of the Crown is the most fundamental government intervention possible to make in any private market. This was not a recommendation from the ACCC’s Retail Electricity Pricing Inquiry and is unlikely to be a successful measure to lower prices for customers.

162

Divestiture order in response to prohibited conduct

The provisions of the Bill in relation to the Court making a divestiture order are significantly different from those in the first Bill in that proposed subsections 153ZB(2)-(5) have been redrafted.

Treasurer must be satisfied The Treasurer is empowered to apply to the Federal Court for a divestiture order under either proposed subsection 153ZB(2) or proposed subsection 153ZB(3) in respect of a body corporate only if the Treasurer is satisfied all of the following conditions are met:

• the ACCC has given the Treasurer a prohibited conduct recommendation which identifies the relevant body corporate

• the application is made no later than 45 days after the day on which the ACCC gave that recommendation to the Treasurer—or 45 days after a variation to the recommendation

• the order applied for is of a kind stated in the ACCC’s recommendation

• the conduct is the prohibited conduct engaged in by the relevant corporation and is prohibited conduct under proposed section 153H (electricity spot market (aggravated case))

161. CCA, proposed section 153Z. 162. Energy Networks Australia, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 8], 3 October 2019, p. 1.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 32

• the order applied for is a proportionate means of preventing the relevant corporation (or any related body corporate) from engaging in that kind of prohibited conduct in the future and

• the order applied for will result in a benefit to the public or where the order applied for will result in a detriment to the public—the benefit would outweigh that detriment.163

Court must be satisfied The Court may make a divestiture order in relation to the body corporate if:

• the Court finds that the conduct identified in the ACCC’s recommendation is prohibited conduct (electricity spot market (aggravated case)) (that is, type 4) and

• the Court is satisfied that the order is a proportionate means of preventing the relevant corporation, or any related body corporate, from engaging in that kind of prohibited conduct in the future.164

Order under subsection 153ZB(2) Where the relevant body corporate is not an authority of the Commonwealth or an authority of a state or a territory, the Court may order the body corporate to:

• dispose of interests in securities or assets—other than to a related body corporate or an associate of the body corporate and

• comply with conditions set out in the order.165

Amendment in the House of Representatives As discussed above, Labor Member Mark Butler, moved amendments to proposed subsection 153ZB(3) of the CCA in the House of Representatives during the second reading debate. The relevant amendments were passed and will form part of the text of the Bill to be considered by the Senate.

First reading of the Bill

Order under subsection 153ZB(3) Where the body corporate is an authority of the Commonwealth or an authority of a State or Territory, the Court may order the body corporate to:

• dispose of interests in securities or assets to:

- if the body corporate is an authority of the Commonwealth—an authority of the Commonwealth that is genuinely in competition in relation to electricity markets with the body corporate in relation to which the order is made and

- if the body corporate is an authority of a State or Territory—an authority of that State or Territory that is genuinely in competition in relation to electricity markets with the body corporate in relation to which the order is made and • comply with conditions (if any) specified in the order.

Importantly proposed subsection 153ZB(4) provides that the Court cannot make an order under proposed subsection 153ZB(3) otherwise than as set out in that subsection. This would seem to answer the concerns that a divestiture order might force publicly owned assets into private hands.

163. CCA, proposed section 153ZA. 164. CCA, proposed subsection 153ZB(1). 165. CCA, proposed subsection 153ZB(2).

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 33

In either case the order must specify:

• the interests in the securities and assets, or the kinds of interests in the securities and assets, that the body corporate must dispose of

• the day by which the disposal must be made—being no earlier than 12 months after the day the order is made and

• any other matter that the Court considers necessary for the order to be effective.166

The order may specify conditions with which the body corporate must comply during the period between the making of the order and the disposal of an interest, if the Court is satisfied those conditions are necessary to preserve the value of the interest or the commercial operation of the asset.167

After the Labor amendments

Order under subsection 153ZB(3) Item 1 of the Labor amendments repeals and replaces subparagraphs 153ZB(3)(a)(i) and (ii). Where the body corporate is an authority of the Commonwealth, the Court may order the body corporate to dispose of interests in securities or assets to an authority of the Commonwealth that is genuinely in competition in relation to electricity markets with the body corporate in relation to which the order is made and that the Commonwealth has a controlling interest in that is equal to or greater than the controlling interest that the Commonwealth has in that body corporate.168

The provision relating to a body corporate which is an authority of a State or Territory is in equivalent terms.

The amendments are directed towards ‘closing down the capacity for partial privatisation’ of assets.169 However, the language is somewhat unclear. According to Labor Leader Anthony Albanese ‘under these amendments, this is what will occur: if there is a divestiture proposed of any public asset, it can only be bought by another public asset’.170

Acquisition of property Proposed section 153ZC applies to the proposed contracting orders and divestiture Divisions, and other related provisions. The proposed section provides that a provision has no effect to the extent that it would infringe section 51(xxxi) of the Constitution by resulting in property being acquired under Commonwealth legislation on anything but ‘just terms’. Such a situation may for instance occur where an order for divestiture resulted in a sale of an asset to another party on terms that may be considered less than just due to the enforced sale reducing the value of the asset.

166. CCA, proposed subsections 153ZB(5). 167. CCA, proposed subsection 153ZB(7). 168. Butler, ‘Consideration in detail: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, op. cit. 169. J Chalmers, ‘Second reading speech: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of

Representatives, Debates, (proof), 22 October 2019, p. 11. 170. A Albanese, ‘Consideration in detail: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019’, House of Representatives, Debates, (proof), 23 October 2019, p. 20.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 34

Key issue—divestiture

Existing divestiture power for mergers Section 50 of the CCA prohibits a corporation from acquiring shares of a body corporate or assets of a person if the acquisition would have the effect, or be likely to have the effect of substantially lessening competition. Merger parties have three options as to what action they may take:

1. apply to the ACCC to assess the merger on an informal basis

2. apply to the ACCC for a formal merger authorisation or

3. as merger parties are not legally required to notify the ACCC before completing a merger, there is also the option of proceeding with the merger without seeking clearance—however, this will not prevent the ACCC from subsequently investigating the merger, including making market inquiries to assist its investigation and, if necessary, taking legal action.171

The Federal Court of Australia may stop an acquisition of shares or assets which is likely to have the effect of substantially lessening competition in an Australian market.172 The Court may also ‘undo’ such an acquisition by requiring the shares or assets to be divested if it, or the ACCC, has not stopped the acquisition in time.173 Essentially then, the law operates at two points in time being either:

• at the time the acquisition is contemplated so that the ACCC can obtain a Court order to stop it going ahead or impose conditions on the merger or

• immediately after an unauthorised acquisition to require the corporation to divest only those assets which came into its possession as a result of that unauthorised activity so that it is returned to its previous position.

Section 81 of the CCA operates to unravel the contravening conduct to re-establish the competition that existed before the market was distorted by the acquisition.174 As such it cannot be characterised as a law with respect to the acquisition of property and it does not infringe section 51(xxxi) of the Constitution that property only be acquired under Commonwealth legislation on ‘just terms’.

There are two potential difficulties arising from both the contracting power and the divestiture power in the Bill:

• it is not clear that the powers must be used merely to establish (or re-establish) competition as with the merger provisions. In that case, the powers might be said to operate as a penalty similar to forfeiture

• the Bill does not contain a clear mechanism to address a circumstance where there is no buyer for the securities or assets which are the subject of a divestiture order or where the buyer is not considered a suitable buyer in accordance with the provisions of the Foreign Acquisitions and Takeovers Act 1975. This could lead to the Treasurer obtaining an order for divestiture under an Act and then making an order under a different Act that the proposed acquisition is prohibited.175

171. ACCC, ‘About mergers’, ACCC website. 172. CCA, section 80 allows for the grant of an injunction to stop a breach of a provision of Part IV. 173. CCA, section 81. 174. WSGAL Pty Ltd v Trade Practices Commission, [1994] FCA 1079. 175. Foreign Acquisitions and Takeovers Act, section 67.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 35

Stakeholder comments Industry stakeholders strongly disagree with the introduction of a divestiture power. For instance, Origin states its belief that ‘powers to effect forced divestiture should not be pursued as it is a disproportionate remedy which singles out the energy sector’.176

Reviews considering divestiture Importantly, both the ACCC Electricity Report177 and the 2015 Competition Policy Review conducted by Ian Harper rejected the notion of a divestiture law:

Providing a general divestiture provision within the CCA for Part IV offences could, if exercised, see matters of market conduct dealt with through a structural remedy. Although reducing the size of a firm may limit its ability to misuse its market power, divestiture is likely to have broader impacts on the firm’s general efficiency. Such changes could also have negative flow-on effects to consumer welfare. It is also possible that divested parts of a business might be unviable. Further, it would leave the redesign of a firm or industry in the hands of the court, which is generally not well positioned to make decisions about industry policy.

178

Other provisions There are basic differences between a criminal prosecution and civil penalty proceedings. Those basic differences include these considerations:  a criminal prosecution is an accusatorial proceeding governed by the fundamental principle

that the Crown bears the burden of establishing guilt beyond reasonable doubt, whereas civil penalty proceedings are adversarial and are governed by the issues and the scope of relief framed by the parties as they choose  a criminal prosecution is aimed at securing a criminal conviction whereas a civil penalty proceeding is calculated to avoid the notion of criminality as such  the imposition of criminal penalties is conditioned by notions of ‘retribution’ and ‘rehabilitation’ as well as general and specific deterrence, whereas the purpose of civil penalties is primarily compliance with the law.179

Existing section 76 of the CCA provides for pecuniary penalties for contraventions to the Act.

Item 6 of Part 2 in Schedule 1 to the Bill inserts proposed subparagraph 76(1)(a)(iiia) into the CCA. Item 7 of Part 2 in Schedule 1 to the Bill amends paragraph 76(1A)(aa). Together these amendments operate to insert references to Division 2 of Part XICA (that is, the prohibited conduct) into section 76 of the CCA to ensure penalties are payable in relation to a contravention of the four types of prohibited conduct.

The maximum pecuniary penalty applicable to a breach of the prohibited conduct provisions is the greatest of the following:

• $10,000,000

176. Origin, Submission to the Senate Standing Committee on Economics, Inquiry into the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, [Submission no. 12], 3 October 2019, p. 1. 177. ACCC, Restoring electricity affordability and Australia's competitive advantage , op. cit., p. 89. 178. Competition Policy Review Panel, Competition policy review: final report, (Harper Review: Final Report), Treasury, Canberra,

March 2015, p. 346. 179. ACCC v Cement Australia Pty Ltd, [2016] FCA 453, paragraphs 28-29.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 36

• if the court can determine the total value of the benefits that have been obtained by one or more persons and that are reasonably attributable to the act or omission—three times that total value

• if the court cannot determine the total value of those benefits—ten per cent of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the act or omission occurred.

However, proposed section 153ZD—which was not included in the first Bill—limits the liability for pecuniary penalties to directors, secretaries or senior managers of the corporation (as defined by the Corporations Act 2001):

• who have aided, abetted, counselled or procured a corporation to engage in prohibited conduct

• who have induced, or attempted to induce, a corporation, whether by threats or promises or otherwise, to engage in prohibited conduct

• who have been in any way, directly or indirectly, knowingly concerned in, or party to, the prohibited conduct or

• who have conspired with others for a corporation to engage in prohibited conduct.

Schedule 2—key issues and provisions Part IIIAA of the CCA establishes the Australian Energy Regulator (AER).

Potential for retail electricity industry code The Electricity Report made the following recommendations in relation to standing offers to residential customers:

No. Recommendation

30 In non-price regulated jurisdictions, the standing offer and standard retail contract should be abolished and replaced with a default market offer at or below the price set by the AER.  Designated retailers, as defined in the [National Energy Retail Law], should be

required to supply electricity to consumers under a default offer on request, or in circumstances where the consumer otherwise does not take up a market offer.  The default offer should contain simple pricing, minimum payment periods, and access to bill smoothing and paper bills.  The AER should be given the power to set the maximum price for the default offer

in each jurisdiction. This price should be the efficient cost of operating in the region, including a reasonable margin as well as customer acquisition and retention costs.  The default offer should be used by retailers in all circumstances where a standing offer is currently used. This includes circumstances where a consumer has moved

into a premises but has not contacted the retailer, where a consumer has not selected a market offer before the expiry of a market contract, and where a consumer is switched through a retailer of last resort event.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 37

No. Recommendation

32 If a retailer chooses to advertise using a headline discount claim it must calculate the discount from the reference bill amount published by the AER.  The AER should publish a reference bill amount for each distribution zone using AER bill benchmarks for medium (2-3 person) households and the price set by the AER

for default offers (recommendation 30 above)  Retailers must calculate all discounts off the reference bill, including win-back and retention offers that have discounts attached to them  Headline discounts in advertising must only include guaranteed (unconditional)

discounts.

Source: ACCC, Restoring electricity affordability and Australia's competitive advantage, op. cit., p. xxii.

The following recommendations deal with the extension of those recommendations to small businesses:

No. Recommendation

49 The ACCC’s recommendation to abolish the standing offer and replace it with a default offer at or below a price set by the AER (recommendation 30) should be extended to all generally available offers including offers for [small and medium enterprise] customers.

50 The ACCC’s recommendation that all discounts must be calculated from a reference bill amount set by the AER (recommendation 32) should be extended to all generally available offers including offers for SME customers. The AER should develop a process for determining a benchmark for representative usage levels for an average SME customer. Similarly, restricting conditional discounts to the reasonable savings that a retailer expects to make if a consumer satisfies the conditions (recommendation 33) should also apply to offers for small business. Source: ACCC, Restoring electricity affordability and Australia’s competitive advantage, op. cit., p. xxv.

According to the Explanatory Memorandum to the Bill:

These recommendations were implemented through a mandatory industry code - the Electricity Retail Code of Conduct - prescribed (under section 51AE of the CCA) in Part 2 of the Competition and Consumer (Industry Code-Electricity Retail) Regulations 2019. The code commenced on 4 April 2019. Associated functions (such as the determination of maximum standing offer prices for supplying electricity to small customers) were conferred (under section 44AH(b) of the CCA) on the AER in Part 3 of those Regulations.

180

Regulation-making Currently, section 44AH of the CCA sets out the functions and powers of the AER. Item 2 in Schedule 2 to the Bill inserts proposed subsections 44AH(2)-(4) which permit Regulations made under the CCA to empower the AER to make legislative instruments consistent with its functions.

180. Explanatory Memorandum, Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019, p. 73.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 38

Such legislative instruments are not subject to the disallowance procedures set out the Legislation Act 2003.181

Potential for retail electricity industry code Item 6 in Schedule 2 to the Bill inserts proposed subsection 51AE(3) into the CCA so that if a mandatory retail electricity industry code is prescribed, it may make provision in relation to a matter by applying, adopting or incorporating, with or without modification, any matter contained in an instrument or other writing as in force or existing from time to time.

As stated above Industry Code—Electricity Retail Regulations have been made and commenced on 5 April 2019. Part 3 of the Regulations confer price setting functions to the AER. Specifically, the AER is required to determine:

• how much electricity a broadly-representative small customer of a particular type in a particular distribution region would consume in a year and the pattern of that consumption (the model annual usage)

• a reasonable total annual price for supplying electricity (in accordance with the model annual usage) to small customers of that type in that region (the DMO price).182

Consistent with the Regulations, the AER has made the Competition and Consumer (Industry Code—Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2019 which commenced on 1 July 2019.

Other provisions

Confidentiality Existing section 44AAF of the CCA requires the AER to take all reasonable measures to protect information which has been given to it from unauthorised use or disclosure. Item 3 in Schedule 2 to the Bill inserts proposed subsections 44AAF(3A) and (3B) to permit the AER to disclose information which it is satisfied will enable or assist an entity to perform or exercise any of the entity’s functions or powers. The relevant entities are:

• a Department

• a body (whether incorporated or not) established or appointed for a public purpose by a law of the Commonwealth

• a body established or appointed by the Governor-General, or by a Minister, otherwise than by a law of the Commonwealth and

• the holder of an office established for public purposes by a law of the Commonwealth.

Obtaining information and documents Item 5 in Schedule 2 to the Bill inserts proposed sections 44AAFA-44AAFC into the CCA. These sections operate as follows:

181. Legislation Act 2003, section 42 generally permits a legislative instrument to be subject to disallowance if either a Senator or Member of the House of Representatives moves a motion of disallowance within 15 sitting days of the day that the legislative instrument is tabled.

182. Explanatory Statement, Competition and Consumer (Industry Code—Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2019.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 39

• proposed section 44AAFA sets out the manner in which notices are given to a person by the AER and the form those notices must take when the AER requires a person to give information, produce documents or appear before the AER to give evidence and produce documents

• proposed section 44AAFB provides that a person who is given a notice under proposed section 44AAFA commits an offence if they fail to comply with the notice. The maximum penalty for the offence is imprisonment for two years, or 100 penalty units, or both.183 However, the Bill sets out two exceptions:

- proposed subsection 44AAFB(2) provides an exception so that the offence does not apply if a person is not capable of complying with the notice and - proposed subsection 44AAFB(3) provides an exception if the person can prove that, after a reasonable search, they are not aware of the documents specified in the notice and the

person provides a written response to the notice, including a description of the scope and limitations of the search • proposed section 44AAFC empowers the AER to inspect documents produced under proposed section 44AAFA and to make and retain copies of those documents.

Concluding comments This Bill introduces four types of prohibited conduct in the electricity market. Two of those types of conduct may give rise to the Treasurer making a contracting order which dictates, amongst other things, the types of contracts to be entered into by a specified body corporate and may set the price of electricity under those contracts for a period of up to three years. For the most egregious of prohibited conduct, the Treasurer may apply to the Federal Court for an order that a specified body corporate divest certain of its assets.

183. Under section 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210.

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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 40

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