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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019

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THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Josh Frydenberg MP)

 

 



Table of contents

Glossary............................................................................................................. 1

General outline and financial impact........................................................... 3

Chapter 1 ........... Overview.............................................................................. 5

Chapter 2 ........... Prohibited conduct........................................................... 11

Chapter 3 ........... ACCC responses............................................................. 37

Chapter 4 ........... Treasurer’s contracting orders....................................... 43

Chapter 5 ........... Court ordered divestiture................................................. 53

Chapter 6 ........... Prohibited conduct notices and recommendations.... 61

Chapter 7 ........... AER information gathering............................................. 73

Chapter 8 ........... Regulation impact statement.......................................... 79

Chapter 9 ........... Statement of Compatibility with Human Rights........ 109

 

 



The following abbreviations and acronyms are used throughout this Explanatory Memorandum.

Abbreviation

Definition

ACCC

Australian Competition and Consumer Commission

AEMO

Australian Energy Market Operator

AER

Australian Energy Regulator

ASIC

Australian Securities and Investments Commission

Bill

Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019

CCA

Competition and Consumer Act 2010

CSIRO

Commonwealth Scientific and Industrial Research Organisation

National Electricity Law

The National Electricity Law set out in the Schedule to the National Electricity (South Australia) Act 1996 of South Australia, as applied in the laws of other states, the territories, and the Commonwealth.

National energy laws

The National Electricity Law, the National Gas Law and the National Energy Retail Laws

NEM

National Electricity Market

 

 



Schedule 1 - Prohibited conduct in the electricity industry

Schedule 1 to the Bill implements a comprehensive legislative framework consisting of new prohibitions and remedies tailored to conduct in electricity markets.

Date of effect : The day of 6 months after the Bill receives the Royal Assent.

Proposal announced : This measure was announced by the Government on 20 August 2018.

Financial impact : This Schedule has no financial impact.

Human rights implications : The Bill engages human rights. See Statement of Compatibility with Human Rights — Chapter 9.

Compliance cost impact : Low.

Summary of regulation impact statement

Regulation impact on business

Impact : An average increase of $0.79 million per year for businesses, a low compliance cost impact.

Main points :            

•        Schedule 1 to the Bill is expected to involve three sources of additional compliance costs for businesses operating in electricity retail, contract and wholesale markets.

•        Firstly, under the Electricity Price Monitoring Inquiry, the ACCC is expected to issue information-gathering notices. Electricity businesses will incur costs in complying with such notices.

•        Secondly, electricity retailers and generators are expected to incur additional legal costs following the commencement of the legislation, seeking advice to learn about the new regime and ensure their business practices are compliant.

•        Finally, where the ACCC identifies potential prohibited conduct through its Electricity Price Monitoring Inquiry, the ACCC may issue information-gathering notices to investigate the conduct. Recipients of such notices will incur costs in complying with the notices.

•        It is expected that these costs will primarily relate to transitional issues, which will be mitigated through a six-month delay in the commencement of Schedule 1 to the Bill.

 Schedule 2 - AER information gathering

Schedule 2 to the Bill provides the AER with the necessary powers required for its functions to set a default market offer and reference bill, including information gathering powers, making necessary legislative instruments, and information sharing with government agencies.

Date of effect : The day the Bill receives the Royal Assent.

Proposal announced : This measure was announced by the Government on 20 August 2018.

Financial impact : Nil.

Human rights implications : The Bill engages human rights. See Statement of Compatibility with Human Rights — Chapter 9.

Compliance cost impact : Low.

Summary of regulation impact statement

Regulation impact on business

Impact : The measures in Schedule 2 to the Bill involve limited compliance costs in terms of information gathering powers, as these new powers are broadly consistent with information gathering powers ascribed to the AER under the National Electricity Laws.

Main points :

•        As these information gathering powers are broadly consistent with those powers already available to the ACCC as a part of its ongoing monitoring function of the NEM, it is anticipated that these additional information gathering powers would not require energy businesses to share information beyond what is already being collected and provided to the ACCC.

 



Chapter 1          

Overview

Outline of chapter

1.1                   This chapter sets out the context and background to the Bill. The Bill implements part of the Government’s policies to ensure well-functioning electricity markets that deliver benefits for consumers and small businesses.

Context of amendments

1.2                   On 20 August 2018 the Government announced a package of measures in relation to the electricity sector.

1.3                   The Government’s announcement followed the Final Report of the ACCC’s Retail Electricity Pricing Inquiry , which was released on 11 July 2018. The Final Report was the culmination of a 15 month investigation into the supply of retail electricity and the competitiveness of retail electricity prices.

1.4                   The Government is progressing a number of the ACCC’s recommendations, and has tasked the ACCC with undertaking an ongoing Electricity Price Monitoring Inquiry across the National Electricity Market between 2018 and 2025.

1.5                   The remedies contained in the Bill will support the ACCC’s inquiry, by allowing the ACCC to respond to misconduct identified as part of its price monitoring inquiry.

1.6                   The remedies and other measures in the Bill only apply to the electricity sector, and complement the existing provisions of the CCA and the National Electricity Law.

Summary of new law

1.7                   Schedule 1 to the Bill sets out three kinds of prohibited conduct. These are:

•        prohibited conduct in relation to retail prices;

•        prohibited conduct in relation to the electricity financial contract market; and

•        prohibited conduct in relation to the wholesale electricity market.

1.8                   If the ACCC reasonably believes that a person has engaged in prohibited conduct, the legislation makes available a graduated range of remedies that can apply.

1.9                   The ACCC may:

•        issue a public warning notice;

•        issue an infringement notice;

•        accept a court-enforceable undertaking;

•        apply to a court for an injunction;

•        apply to a court for a pecuniary penalty.

1.10               In the event that the ACCC reasonably believes that a person has engaged in certain prohibited conduct in relation to the electricity financial contract market or the wholesale electricity market, the ACCC may recommend that the Treasurer make an order with contracting obligations that would require an electricity company to offer electricity financial contracts to third parties.

1.11               If the ACCC reasonably believes that a person has engaged in certain prohibited conduct in relation to the wholesale electricity market, then the ACCC may recommend that the Treasurer make an application to the Federal Court seeking an order directing the person to divest specified assets.

1.12               It is intended that the making of a contracting order by the Treasurer, or an application to the Federal Court by the Treasurer, would only occur in respect of more serious contraventions, where such an action is proportional and targeted to the conduct.

1.13               The provisions in the Bill apply nationwide, including to areas that are not connected to the NEM.

1.14               As the ACCC’s Electricity Price Monitoring Inquiry will end on 31 August 2025, the measures contained in Schedule 1 to the Bill also end in 2025.

1.15               Schedule 2 to the Bill confers new compulsory information gathering powers on the AER, allows the AER to share information with other agencies and facilitates the conferral on the AER of functions related to the regulation of retail electricity prices.

Application and commencement provisions

1.16               Schedule 1 commences 6 months after the Bill receives the Royal Assent, and Schedule 2 commences on the day the Bill receives the Royal Assent.

1.17               The provisions in Schedule 1 to the Bill apply between the Bill’s commencement and 31 December 2025. This ensures that the provisions in Schedule 1 run until the ACCC’s Electricity Price Monitoring Inquiry has concluded. [Schedule 1, item 1, section 153B]

1.18               The amendments in Parts 1 and 2 to Schedule 1, which set out the provisions relating to prohibited conduct and the ACCC and Treasurer responses, apply in relation to prohibited conduct that is engaged in on and after the commencement of those provisions, or to conduct that continues to be engaged in on and after commencement. The provisions do not apply to prohibited conduct that is conducted before the date that Schedule 1 commences. [Schedule 1, item 14]

Comparison of key features of new law and current law

New law

Current law

Prohibited conduct

A corporation cannot engage in prohibited conduct in relation to:

•           retail pricing of electricity;

•           the electricity financial contract market; and

•           the wholesale electricity market.

No equivalent.

Public warning notices

The ACCC may issue a public warning notice to a corporation that it reasonably believes has engaged in, or is engaging in, prohibited conduct, after giving the corporation 21 days to respond to a draft notice. The ACCC must reasonably believe that the corporation has engaged in, or is engaging in, prohibited conduct, the prohibited conduct has or will result in detriment to one or more persons and that it is in the public interest to issue the notice.

No equivalent.

Infringement notices

The ACCC may issue an infringement notice if it reasonably believes that a corporation has contravened the prohibited conduct provisions.

The penalty amount for a corporation is 600 penalty units.

No equivalent.

Injunctions

The ACCC may apply to a court for an injunction to stop a corporation from engaging in prohibited conduct, or to otherwise direct them.

No equivalent.

Pecuniary penalties

The ACCC may apply to a court for an order that a corporation has engaged in prohibited conduct, and for a pecuniary penalty for engaging in the prohibited conduct.

The maximum penalty amount that the court can order is the greatest of:

•           $10,000,000;

•           three times the value of the total benefit attributable to the conduct;

•           10 per cent of the annual turnover of the corporation in the 12 months before the conduct occurred.

No equivalent.

Treasurer responses

Following the receipt of a prohibited conduct recommendation from the ACCC that relates to certain wholesale or financial contract market prohibited conduct, the Treasurer can issue a written order to the corporation or body corporate identified in that recommendation and order them to make offers to enter into electricity financial contracts with third party entities.

No equivalent.

Following the receipt of a prohibited conduct recommendation from the ACCC that relates to certain wholesale market prohibited conduct, the Treasurer may apply to the Federal Court for an order directing a corporation or body corporate identified in that recommendation to dispose of their interests in securities or assets that are part of their electricity business.

 

Notice and recommendation requirements

The ACCC can:

•           give a prohibited conduct notice to the corporation that it reasonably believes has engaged or is engaging in prohibited conduct;

•           give a prohibited conduct recommendation to the Treasurer including the reasons why the ACCC believes the corporation has engaged in prohibited conduct and a recommendation for the Treasurer to take further action in relation to the prohibited conduct; and

•           give a no Treasurer action notice to the Treasurer if the ACCC considers that a prohibited conduct recommendation is not appropriate.

No equivalent.

The ACCC may vary or revoke a prohibited conduct notice, prohibited conduct recommendation, or no Treasurer action notice.

No equivalent.

AER information gathering

AER may require a person to produce a document or provide written or oral evidence if it requires the document or evidence for the performance of its Commonwealth functions.

No equivalent.

AER may also disclose information to an agency if satisfied that the information will enable or assist the agency to perform or exercise its functions or powers.

AER may disclose information to specified or prescribed bodies.

Regulations conferring Commonwealth functions on the AER may empower the AER to make disallowable or non-disallowable legislative instruments.

No equivalent.

Regulations prescribing an industry code for electricity retailers may apply, adopt or incorporate any matter contained in an instrument (including a non-disallowable legislative instrument made by the AER) as in force or existing from time to time.

No equivalent.

 



Chapter 2          

Prohibited conduct

Outline of chapter

2.1                   This Chapter explains the provisions in the Bill that define prohibited conduct in electricity retail, contract and wholesale markets.

Context of amendments

2.2                   The provisions of the Bill are aimed at potential conduct (called ‘prohibited conduct’) in retail electricity, contract and wholesale markets which can be harmful to competition or lead to poor outcomes for electricity consumers.

2.3                   Division 2 of new Part XICA of the CCA defines the prohibited conduct that the Bill seeks to prevent. The prohibited conduct broadly relates to the possibility of taking advantage of small consumers, anti-competitive contracting behaviour, and conduct which undermines the effective operation of the wholesale market.

Summary of new law

2.4                   The Bill creates three new electricity sector-specific prohibitions on certain conduct in electricity markets. The prohibitions relate to retail pricing, financial contract market liquidity and conduct in wholesale spot markets.

Detailed explanation of new law

2.5                   A corporation (together with one or more of its related body corporates) might engage in conduct in electricity retail, contract or wholesale markets that has the purpose or result of undermining effective competition in those markets or leading to poor outcomes for consumers. The Bill creates three prohibitions on conduct that, if engaged in by certain participants in electricity markets, can be detrimental to competition or to consumer welfare. [Schedule 1, item 1, section 153C, definition of ‘prohibited conduct’]

2.6                   The Bill is concerned with preventing certain conduct in the following parts of the electricity supply chain:

•        The wholesale market , whereby electricity generators produce electricity that is supplied into the electricity grid and distributed to customers. This can be done through a spot market, such as that which exists for the NEM.

•        The financial (or hedging) contract market , whereby electricity generators, electricity retailers and some end users enter into derivative contract arrangements to manage price risk arising in the wholesale market. Other entities, such as financial intermediaries and speculators, may also engage in this market.

•        The retail market , whereby electricity is supplied to most end users of electricity (such as residential and small business consumers) through retail contracts.

2.7                   The Bill does not create prohibitions on conduct by electricity network businesses (transmission and distribution businesses).

2.8                   For the purposes of the Bill, ‘generate’ and related terms, such as ‘generator’ and ‘generation asset’ should be interpreted broadly as related to any form of capacity capable of being bid into the wholesale spot market and includes, among other things, an asset that can store and dispatch electricity. The term is to be afforded a technology-neutral meaning, to apply to new forms of capacity as they are developed. ‘Generate’ is to be interpreted in line with the general understanding of the term as applied by market bodies (such as regulators) and market participants.

What kind of entities cannot engage in prohibited conduct?

2.9                   The prohibitions in the Bill on engaging in certain categories of conduct apply to ‘corporations’. The term corporation is already defined in subsection 4(1) of the CCA to be a body corporate that:

•        is a foreign corporation;

•        is a trading corporation formed within the limits of Australia;

•        is a financial corporation formed within the limits of Australia;

•        is incorporated in a Territory; or

•        is a holding company of a body corporate covered by the above points.

2.10               This definition covers those body corporates in relation to which the Commonwealth Parliament can legislate (see sections 51(xx) and 122 of the Constitution) and binds the Crown in right of the States and Territories. [Schedule 1, item 2, paragraph 2B(1)(ba)]

2.11               A corporation here includes a corporation acting in the capacity of a trustee.

2.12               Paragraphs 2.106 to 2.119 detail rules on the application of Part XICA to corporate group structures.

2.13               The prohibited conduct provisions apply to conduct engaged in outside Australia where the body corporate is incorporated or carrying on a business in Australia. [Schedule 1, items 3 and 4, paragraphs 5(1)(ba) and (f)]

Prohibited conduct in the retail electricity market

2.14               The first category of prohibited conduct created by the Bill relates to the retail market. [Schedule 1, item 1, section 153E]

2.15               Over time various factors, such as increased electricity generation capacity or more effective competition, could result in sustained decreases in supply chain costs for retailers. This prohibition is designed to ensure consumers see the benefit of supply chain cost savings, and that such savings are not retained by retailers to the detriment of their consumers.

2.16               The Treasurer may not make a contracting order, or apply to the court for a divesture order, in relation to a breach of the retail pricing prohibition. The available remedies are detailed in Chapter 3.

What is prohibited conduct relating to retail pricing?

2.17               The Bill provides that a corporation engages in prohibited conduct if it:

•        offers to supply, or actually supplies, electricity to ‘small customers’ [Schedule 1, item 1, paragraph 153E(1)(a)] ; and

•        fails to make reasonable adjustments to the price of those offers or supplies to reflect reductions in its underlying cost of procuring that electricity [Schedule 1, item 1, paragraph 153E(1)(b)] .

2.18               Paragraph 153E(1)(a) provides that the retail pricing prohibition applies to electricity retailers that sell, or offer to sell, electricity to ‘small customers’ (residential or small business consumers).

2.19               Paragraph 153E(1)(b) is the operative rule aimed at ensuring that reductions in supply chain costs for the particular retailer in question are passed on to the retailer’s residential and small business customers.

2.20               The prohibition only applies to market offers for electricity (that is, retail offers which are on terms set by retailers). The prohibition does not require retailers to adjust their standing offer prices (that is, retail offers which retailers are required by law to provide).

2.21               For example, in the event of a sustained and substantial reduction in underlying costs, a retailer will not be required to adjust the prices of its default market offers made under the Competition and Consumer (Industry Code - Electricity Retail) Regulations 2019.

2.22               Subsection 153E(2) provides that a retailer does not contravene section 153E where it fails to adjust its standing offer prices. [Schedule 1, item 1, subsection 153E(2)] .

2.23               The prohibition does not deal with overall increases in supply chain costs.

What is a supply of electricity?

2.24               The existing definition of supply in subsection 4(1) of the CCA applies for the purposes of the new rules in the Bill. A retailer supplies electricity to a small customer if it sells electricity to those customers as final purchasers, for consumption at those small customers’ residences or small business premises.

What is a small customer?

2.25               A small customer is either a residential customer or a small business customer. [Schedule 1, item 1, section 153C, definition of ‘small customer’]

2.26               A residential customer is a person who purchases, or proposes to purchase, electricity for personal, household or domestic use at their premises. [Schedule 1, item 1, section 153C, definition of ‘residential customer’]

2.27               A small business customer is a person who is not a residential customer and who purchases, or proposes to purchase, less than 100 megawatt hours of electricity annually. Where a business operates across one or more premises, the business will be a ‘small business customer’ for the purposes of the Bill if the business purchases, or proposes to purchase, less than 100 megawatt hours of electricity in a financial year when the premises are combined. [Schedule 1, item 1, section 153C, definition of ‘small business customer’]

What is the underlying cost of procuring electricity?

2.28               A retailer’s ‘underlying cost of procuring electricity’, referred to in paragraph 153E(1)(b), means the net cost to the retailer of getting electricity to their small customers.

2.29               The components of retailer’s costs of procuring electricity (their ‘cost stack’), which make up the amounts retailers charge to their consumers, are as follows:

•        Wholesale costs: Includes the retailer’s wholesale costs of: acquiring electricity from the spot market (or other form of market, where there is no relevant spot market); the costs of contracting to manage exposure to wholesale spot price volatility; or direct contracting within an entity in the case of a gentailer (vertically integrated businesses operating as both a generator and retailer).

•        Network costs: The costs charged by transmission and distribution network operators for the transmission of electricity.

•        Environmental costs: The costs of complying with environmental schemes.

2.30               Other relevant concepts, which are not considered costs of ‘procuring electricity’, are as follows:

•        Retail costs: The costs of running a retail business, such as billing, marketing and consumer assistance costs.

•        Retail margins: A measure of a retailer’s profitability, often measured in terms of earnings before interest, tax, depreciation and amortisation or earnings before interest and tax.

2.31               In the case of gentailers, determining the costs of procuring electricity will involve a holistic analysis of the costs of each arm of the business, as an analysis of only one arm of the business may not provide a clear picture. The analysis may include opportunity costs, rather than actual costs, where appropriate. For example, where the generation and retail arms of a gentailer enter into an electricity financial contract, the relevant cost to be considered will be the opportunity cost (that is, the cost that would be expected if the transaction was at arms’ length between unrelated entities). Depending on the approach to internal transactions of a gentailer, the opportunity cost and actual cost in this example may be similar or the same.

2.32               The test in paragraph 153E(1)(b), of sustained and substantial reductions in the cost of procuring electricity, is aimed at the effect that reductions in the overall cost stack have on the ultimate prices charged to a retailer’s small customers. As discussed below, an analysis of the ‘costs of procuring electricity’ must take into account the overall cost stack, including the relative increases or decreases in elements of the cost stack.

2.33               Paragraph 153E(1)(b) refers to the ‘underlying’ cost of procuring electricity to make clear that that cost may not always manifest itself as a direct cost of electricity to the retailer. There may be cases where that cost is reflected in expenses that the retailer pays to intermediaries or interposed entities. Those payments may not nominally be a cost for electricity for on-supply to customers but may have such a cost embedded in them or may relate to acquiring electricity for that purpose. An example would be amounts paid to a broker in relation to financial contracts hedging the cost of electricity on a spot market.

What are ‘reasonable adjustments’ to prices?

2.34               The crux of the test for the retail pricing category of prohibited conduct is whether a particular retailer has made ‘reasonable adjustments’ to the prices it charges small customers to reflect reductions in its underlying cost of procuring electricity. In making that assessment, it will be necessary to have regard to all the relevant facts and circumstances in relation to that particular retailer. This assessment should recognise that while the overall intention is that consumers should see the benefit of lower prices, there can be costs to adjusting pricing, both for consumers (who need to understand and adjust to changes) and for retailers (to implement changes).

2.35               The assessment of whether a corporation has contravened section 153E primarily depends on the following factors:

•        whether any reductions in supply chain costs are sustained and substantial, with reference to broad, market-wide price trends;

•        whether, when and how adjusting prices in response to a relevant reduction would be ‘reasonable’, taking into account the particular circumstances of the retailer in question (including that retailer’s overall operating costs).

Sustained and substantial reductions in supply chain costs

2.36               The test in paragraph 153E(1)(b) is concerned with reductions in underlying costs which are both sustained and substantial. While some consumers actively choose plans which allow for a degree of regular price moderation (such as time of use tariffs), excessively frequent price changes can be detrimental to consumers. Assessments of whether a sustained and substantial reduction in underlying costs has occurred should consider both broad electricity market trends and the specifics of the case.

2.37               It is not intended that retailers be required to adjust their retail prices in response to short term fluctuations in supply chain costs, such as those that reflect normal variations in spot market prices. A change in underlying costs that lasted a week or a month would be unlikely to be considered sustained. However, where it becomes apparent over time that there has been a downward trend in supply chain costs, this would be considered sustained.

Example 2.1 

In the middle of summer, temperatures unexpectedly drop well below average for that time of year. As a result, the demand for electricity also falls, and wholesale spot prices significantly reduce. However, the next week, temperatures, demand and spot prices return to average levels that would be expected during summer. While there may have been a substantial reduction in wholesale prices, the reduction was not sustained, and retailers do not need to adjust their prices to reflect this short-term reduction.

2.38               It is also not intended that retailers adjust their retail prices in response to small moderations in their supply chain costs, as this would place an unreasonable burden on retailers with little benefit flowing to consumers. To be substantial, the reduction in costs must be real or of substance, relative to the overall costs of procuring electricity, though not necessarily large.

Example 2.2 

Wholesale spot prices fall by 20 per cent, and this is also reflected in a retailer’s costs of over-the-counter and derivative contracts. This would be likely to reflect a substantial reduction in the retailer’s underlying costs of procuring electricity. If the reduction is sustained, the retailer will then need to consider their need to make a reasonable adjustment to their retail prices in the retailer’s specific circumstances.

When prices need to be adjusted

2.39               Once a sustained and substantial reduction in supply chain costs has occurred, a retailer will need to consider its need to make a reasonable adjustment to the prices it charges its small customers. This adjustment must be made within a period of time which is reasonable in the circumstances. A retailer will not contravene the prohibition if it has not had a reasonable amount of time to make an adjustment, or if it has made an adjustment which is reasonable in the circumstances.

2.40               It is not intended that retailers are required to make many changes to retail prices throughout a year. Consumers are typically billed on a quarterly basis, and retailers often adjust their retail prices on an annual basis. It would not be reasonable, for example, for a retailer to fail to take into account a sustained and substantial reduction in its supply chain costs the next time it changes its retail prices. Depending on the timing of the reduction in costs relative to the retailer’s next planned price adjustment, it may be reasonable to make an adjustment in advance of that planned adjustment.

Example 2.3 

A retailer experiences a sustained and substantial reduction in its supply chain costs. This reduction becomes clear a month before the retailer’s next annual price update. When making its annual price update, the retailer makes an adjustment to reflect the reduction in supply chain costs. In the circumstances, the retailer has made its adjustment at a reasonable time following the reduction in supply chain costs.

2.41               Other applicable legislation may place requirements on retailers in relation to when and how they may adjust their retail prices (for example, notifying consumers ahead of any adjustment to prices). Subsection 153E(3) makes clear that that retailers are not be required to make an adjustment where this would contravene another law. [Schedule 1, item 1, subsection 153E(3)]

Need to take account of the particular circumstances of the retailer

2.42               The test for prohibited conduct relating to retail pricing acknowledges that different adjustments may be considered reasonable depending on the particular circumstances of the retailer.

2.43               For example, retailers offer a wide range of retail products, which vary in their terms. Some retail offers have a single tariff (a charge expressed in cents per kilowatt hour), while others have peak and off-peak tariffs (where the tariff increases during peak times and decreases during off-peak times). Offers may have other features, such as providing green power, or a solar feed-in tariff. Noting these substantial differences, it may be reasonable for two different offers to be adjusted in different ways. This ensures the legislation can adapt to innovation in retail offerings.

Example 2.4 

Due to the entry of new generation into the system, there has been a substantial and sustained reduction in wholesale spot costs at peak times. Wholesale spot costs at non-peak times have not changed significantly.

Retailer A offers only single-rate tariffs which charge a single price during both peak and off-peak times. Retailer A adjusts its overall tariff to reflect the reduction in wholesale costs.

Retailer B offers a range of retail products, including an offer with a time of use tariff, which charges a higher price during peak times and a lower price during off-peak times. Retailer B adjusts the peak component of its tariff to reflect the reduction in wholesale costs, but does not adjust the off-peak component of its tariff.

Both Retailer A and Retailer B have made reasonable adjustments to their prices, despite making different adjustments to retail offers with different structures.

2.44               In undertaking an assessment of reasonable adjustments, the retailer’s overall operating costs will be relevant. This can include the costs across a business which may operate in multiple States and Territories or nationally.

Example 2.5 

A retailer has a large number of very loyal customers, many of which have been on the same expensive market offer for years and have not taken advantage of the retailer’s better offers. The retailer experiences a sustained and substantial reduction in supply chain costs. The retailer knows many of its customers are not sensitive to changes in prices, and are unlikely to leave for another retailer. The retailer chooses not to pass through any of its supply chain cost reductions in its offers to the loyal customers. In the circumstances, the retailer is likely to have contravened section 153E, as it has failed to make a reasonable adjustment to its prices.

2.45               In analysing the circumstances of the retailer, both the retailer’s current costs and their costs over the longer term will be relevant. For example, retailers’ risk management strategies or pricing strategies may be set several years in advance and locked in over that period. In such circumstances, it may not be reasonable to require an adjustment to be made. It is intended that the requirement to pass through savings does not undermine a retailer’s viability or risk management strategies. 

Example 2.6 

Due to a recent network determination, there is a sustained and substantial reduction in network costs in a particular network region.

Retailer A is a highly profitable incumbent retailer in the region. All else held constant, it would be reasonable for Retailer A to pass through the full reduction in network costs.

Retailer B has recently entered the market, and has been operating at a loss so that it can compete on price with Retailer A and establish a customer base. Retailer B’s strategy is to gradually unwind its pricing structure so that it is profitable in the medium term. Retailer B only partially passes through the price reduction. Retailer B may have made a reasonable adjustment in the circumstances, despite making a smaller price reduction than Retailer A.

Example 2.7 

There has been a substantial and sustained reduction in wholesale spot prices, and a retailer needs to make reasonable adjustments to its retail prices.

The retailer had earlier entered into a number of contracts at a higher point in contract prices, and these contracts continue to run. While the retailer is paying lower wholesale spot prices, it is committed to higher contracting costs, which partially offsets the reduction in wholesale costs. All else held constant, it would be reasonable for the retailer to adjust it prices to reflect the balance of the reduction in wholesale costs and the lack of reduction in contracting costs, as it will be making a reasonable adjustment to the extent its overall supply chain costs have reduced.

Example 2.8 

A retailer negotiates particularly advantageous electricity financial contracts during a temporary low point in the market. Prices in the spot market return to normal soon after the retailer enters the contracts. It may be reasonable for the retailer to not adjust its retail prices given there is not a substantial and sustained reduction in broader market-wide prices.

Example 2.9 

Over a three year period, wholesale prices trend upward for the first two years, and begin to fall in the third year to the point where there has been a sustained and substantial reduction.

In the first two years, a retailer does not increase its prices and absorbs the higher prices which would otherwise flow through to its consumers. All else held constant, when considering the retailer’s pricing over the longer term, it may be considered reasonable for that retailer to make only small adjustment, or no adjustment, to its prices in the third year.

2.46               Where a retailer is able to lower its operating costs, for example by improving its internal processes and becoming more productive, retailers would typically use the resulting savings in the short run to achieve a combination of becoming more price-competitive and benefiting their retail margin. The legislation does not require a retailer to adjust its prices to pass through such efficiency gains, as the legislation is primarily concerned with broad, market-wide price trends. The ability to benefit from efficiency gains is the retailer’s financial incentive to identify improvements. Retailers which identify efficiency gains will remain free to determine whether, and by how much, to reduce their prices to reflect their improved productivity. Over time, it is expected that other retailers would seek to identify similar efficiency gains in order to remain competitive, eventually bringing the market prices offered by all retailers down.

Example 2.10 

A retailer designs an innovative new computer system, which halves the administration work required to process its customer accounts and billing.

Section 153E does not require the retailer to reduce its prices, as there has not been a reduction in the retailer’s costs of procuring electricity. However, due to competitive pressure in the market, the retailer nevertheless reduces its prices by a portion of the savings while also retaining a portion as a return on the investment. Over time, other retailers adopt the same system and prices fall as they compete to retain their market share. The retailer has not breached section 153E.

2.47               Further, a reduction in one element of supply chain costs (such as wholesale prices) may be offset by an increase in another element of supply chain costs (such as network prices), such that the retailer’s costs of procuring electricity have not reduced. Similarly, a reduction in a retailer’s costs of procuring electricity may be offset by an increase in its other operating costs (such as marketing costs). However, it would not be open for a retailer to claim that it has reasonably adjusted its prices (or reasonably failed to adjust its prices) where the relevant costs are artificially inflated.

Example 2.11 

There has been a sustained and substantial reduction in market-wide wholesale spot prices. A gentailer realises it may need to make a reasonable adjustment to its prices to reflect this reduction, and seeks to avoid this. The gentailer does not adjust its retail prices, but instead uses accounting methods to shift its profits to its generation arm, such that the retail arm appears to be paying a much higher spot price than it actually is. In these circumstances, the gentailer has failed to make a reasonable adjustment to its retail prices, as its wholesale costs of procuring electricity have been artificially inflated.

Prohibited conduct in the electricity financial contract market

2.48               The second category of prohibited conduct created by the Bill relates to the electricity financial contract market. It is aimed at ensuring that generators, including gentailers, do not refuse to offer financial contracts for anti-competitive purposes. [Schedule 1, item 1, section 153F]

2.49               For an electricity retailer to be able to compete in the retail market, they need to be able to effectively manage the risk of price volatility in the wholesale market. The availability of financial contracts with counterparties is critical to managing that risk. Those counterparties will usually be electricity generators or those that can enter into financial contracts with such generators.

2.50               In essence, electricity financial contracts allow parties to fix a price for electricity at a particular amount, or within a particular price band. In that way they give generators and retailers certainty about the future price of electricity. Creating certainty in this cost structure is important to allowing retailers to compete in the retail electricity market.

2.51               A gentailer may be well-placed to ensure that its price risk is adequately managed. However, a retailer that does not have a generation arm relies on a liquid financial contract market for the availability of hedging arrangements. A gentailer could potentially use its position to restrict the availability of electricity financial contracts for the purpose of substantially lessening competition.

2.52               This prohibition is not intended to:

•        extinguish contractual arrangements already on foot or compromise a generator’s ability to meet its commitments under existing contracts;

•        deal with contract illiquidity as a result of physical issues in the electricity sector; or

•        interfere with genuine efficient risk management strategies by participants in electricity markets, including internal contracting by a gentailer.

2.53               The Treasurer may make a contracting order, but may not apply to the court for a divesture order, in relation to a breach of the contract liquidity prohibition. The contracting order remedy is detailed in Chapter 4, and the other available remedies are detailed in Chapter 3.

What is prohibited conduct relating to contract market liquidity?

2.54               There are three elements to the test for prohibited conduct relating to electricity financial contract liquidity.

First element - electricity generation

2.55               The first element ensures that only a corporation that generates electricity, either itself or within its corporate group, is subject to this limb. Thus, the corporation or a related body corporate must generate electricity. [Schedule 1, item 1, paragraph 153F(a)]

Second element - behaviour in relation to offering contracts

2.56               The second element describes the ways in which a corporation might engage in contracting behaviour to limit competition. It is intended to cover three possible ways in which that might be done, as follows:

•        The first is where a corporation fails to offer electricity financial contracts. A corporation fails to offer such contracts where it has the ability to do so, but chooses not to. There may be instances where a corporation does not have the ability to offer a contract. For example, for operational reasons, a corporation may not have the ability to offer electricity financial contracts (such as where its generation capacity is not sufficiently firm). In these situations, not offering contracts would not be considered a ‘failure’ in the relevant sense.

•        The second is where a corporation limits or restricts offers to enter into electricity financial contracts, for example, where it significantly reduces the number of electricity contracts it is willing to enter into.

•        The third is where a corporation offers to enter into electricity financial contracts in a way that has, or on terms that have, the effect of limiting or restricting acceptance of those offers. For example, a corporation may offer electricity financial contracts on such commercially unattractive terms that no reasonable counterparty would be likely to accept. Subparagraph 153F(b)(iii) ensures corporations cannot circumvent the prohibition by offering electricity financial contracts with the intention that the offers will not be accepted.

[Schedule 1, item 1, paragraph 153F(b)]

Example 2.12 

Generator A operates a wind farm. Generator A does not enter into contracts, as its generation assets are not sufficiently firm (that is, it is difficult to predict whether and when the wind will be blowing to power its wind farm, so Generator A is unable to guarantee it can meet its commitments under the contract). In these circumstances, Generator A has not failed to offer electricity financial contracts, because for operational reasons it is unable to do so.

2.57               Except in the circumstances described in subparagraph 153F(b)(iii), this element will not be satisfied in circumstances where a corporation makes a genuine offer to enter into an electricity financial contract, but the offer is not accepted.

Third element - purpose test

2.58               The third element provides that the behaviour described in the second element must be engaged in by the corporation for the purpose of substantially lessening competition in any electricity market. [Schedule 1, item 1, paragraph 153F(c)]

2.59               A corporation will not breach the prohibition where it engages in behaviour covered by the second element, but its purpose was not to substantially lessen competition in any electricity market. This ensures that electricity market participants may continue their genuine risk management strategies without falling within the scope of the prohibition.

What is an electricity financial contract?

2.60               The contract market liquidity prohibition is centred on the offering of ‘electricity financial contracts’. The Bill defines an electricity financial contract as a contract where the rights under the contract are derived from, or relate to, the price of electricity on an electricity spot market but where the operator of that spot market is not a party to the contract. [Schedule 1, item 1, subsection 153C, definition of ‘electricity financial contract’]

2.61               This definition is intended to cover the range of derivative contracts that are used by participants in the electricity industry to wholly or partially manage their exposure to spot market prices. It does not include contracts, for the physical supply of electricity through a spot market, with the operator of that market (the entity responsible for the settlement of transactions for that physical supply). An example of such an operator is the AEMO in relation to the NEM. This is intended to distinguish electricity financial contract market activity, to which this prohibition applies, from wholesale spot market conduct, to which this prohibition does not apply.

2.62               An electricity financial contract generally includes:

•        bilateral contracts entered into between participants in the electricity industry, such as generators and retailers, who face opposing risks in relation to the spot price (these are often referred to as ‘over-the-counter’ contracts); and

•        exchange traded futures and options, which are highly standardised contracts traded on an exchange with a centralised clearing function.

2.63               Examples of the common types of electricity financial contracts are put and call options (referred to as ‘floors’, ‘caps’ and, when combined, ‘collars’), electricity futures, power purchase agreements and off-take agreements. These agreements typically provide for compensation to be paid in the amount of the difference between the spot price and the agreed ‘strike’ price. These agreements may have other terms.

2.64               For example, under a swap arrangement entered into between a generator and a retailer:

•        if the spot price is higher than the strike price fixed by the swap, the generator will pay the retailer the difference; and

•        if the spot price is lower than the strike price fixed by the swap, the retailer will pay the generator the difference.

What is an electricity spot market?

2.65               The term ‘electricity spot market’ is used in various parts of the Bill. For example, it is used in the definition of ‘electricity financial contract’. The Bill inserts a definition of the term into the CCA. An electricity spot market is defined as a spot market for the supply of electricity. [Schedule 1, item 1, section 153C, definition of ‘electricity spot market’]

2.66               A spot market is commonly understood to be a market in which commodities or financial instruments are acquired and supplied, usually for immediate delivery. The price quoted for the acquisition and supply of the commodity or instrument is referred to as the ‘spot’ price. Typically, a spot market will have a centralised clearing function for all trades that occur on the market. That means that trades are not made directly between a buyer and a seller, but occur through a market operator or clearing house.

2.67               An electricity spot market is a form of wholesale market for electricity that facilitates the exchange of electricity between generators and retailers (or some others such as large scale industrial users). Because electricity supply and demand need to be matched instantaneously, an electricity spot market operates as a market where electricity supply is ‘pooled’. All electricity supplied to the market is bought and sold at the ‘spot’ price.

2.68               In such a spot market:

•        generators are paid for the electricity they supply; and

•        retailers pay for the electricity they acquire for on-supply to their customers.

2.69               A spot market operator manages the spot market process, including matching supply and demand and settling all transactions. For example, the NEM wholesale spot market is operated by AEMO.

What is an electricity market?

2.70               The financial contract liquidity prohibition prohibits certain conduct carried out for the purpose of substantially lessening competition in any electricity market. The Bill inserts a definition of ‘electricity market’ into the CCA which covers:

•        A market in relation to the supply of electricity is an electricity market . This covers the wholesale market and the retail market (see discussion of those markets at paragraph 2.6). [Schedule 1, item 1, section 153C, paragraph (a) of the definition of ‘electricity market’]

•        A market for electricity financial contracts is also an electricity market . This covers the financial contract market discussed in paragraph 2.6. [Schedule 1, item 1, section 153C, paragraph (b) of the definition of ‘electricity spot market’]

Purpose of substantially lessening competition

2.71               The conduct set out in paragraph 153F(b) is only prohibited where the corporation engages in the conduct for the ‘purpose of substantially lessening competition’ in any electricity market. [Schedule 1, item 1, paragraph 153F(c)]

2.72               The intention of the ‘purpose of substantially lessening competition’ test is to distinguish contracting decisions reflecting genuine, efficient risk management from contracting decisions with an anti-competitive purpose.

2.73               The concept of ‘substantially lessening competition’ is used in various existing parts of the CCA (see, for example, sections 45, 45B, 45C, 46, 47, 49, 50 and 50A). It is intended to carry the same meaning in section 153F as it has in other parts of the CCA, adapted to the context of electricity markets and the conduct described in paragraph 153F(b). By virtue of section 4G of the CCA, the reference to ‘lessening’ competition includes preventing or hindering competition.

2.74               The concept of substantially lessening competition is generally concerned with the impact on the competitive process rather than the impact on any particular participant in the market, noting that, in some instances, harm to an actual or potential individual competitor may also substantially lessen competition where that competitor represents a strong competitive constraint.

2.75               The question posed by paragraph 153F(c) is whether the corporation engaged in conduct for the ‘purpose’ of substantially lessening competition. It is not necessary that the conduct has the effect or likely effect of substantially lessening competition, although the actual or likely effect of the conduct may be relevant to the assessment of whether the corporation has the necessary purpose. Where contracting behaviour may have the effect or likely effect of substantially lessening competition, but does not have the purpose of substantially lessening competition, the prohibition will not be contravened. Under paragraph 4F(1)(b) of the CCA, ‘purpose’ includes a substantial purpose rather than just a sole purpose.

2.76               The purpose test requires an objective assessment of all the relevant facts and circumstances to ascertain whether the corporation acted for the relevant purpose. This might include, but is not limited to, evidence about the intent of those acting for the corporation. The purpose of the corporation can be inferred from all the relevant surrounding circumstances, including the conduct of the corporation or other persons (such as its officers or agents). [Schedule 1, item 1, section 153J, items 10 and 11, paragraph 84(1)(b) and (ba)]

Example 2.13 

Gentailer A routinely enters into over-the-counter contracts with three smaller standalone retailers, Retailers B, C and D.

Retailer B offers an innovative new deal, and quickly becomes a competitive threat to Gentailer A at the retail level. Gentailer A’s customers begin switching to Retailer B, to take advantage of the deal.

Gentailer A continues contracting with Retailers C and D, but refuses to contract with Retailer B. Gentailer A knows that Retailer B has no generation assets of its own and that refusing to contract with Retailer B will make it very difficult for Retailer B to access contracts and manage its exposure to wholesale spot market volatility. Gentailer A hopes that Retailer B will be forced to exit the market, restoring Gentailer A to its former dominant position.

In suddenly refusing to contract with Retailer B, Gentailer A had the purpose of substantially lessening competition at the retail level.

Example 2.14  

Gentailer A, a small gentailer, has a risk management policy under which it:

•        contracts 40 per cent of its generation capacity to its retail arm to cover its retail customers;

•        contracts 40 per cent of its generation capacity to third parties; and

•        leaves 20 per cent of its generation capacity uncontracted, to allow for unplanned outages and maintenance, instead selling this capacity solely on the wholesale spot market.

Retailer B approaches Gentailer A and asks to enter into an over-the-counter contract for the last 20 per cent of Gentailer A’s generation capacity. Gentailer A’s risk management policy does not allow Gentailer A to enter into the contract proposed by Retailer B. Gentailer A has not contravened section 153F, as its failure to offer a contract did not have the purpose of substantially lessening competition.

Prohibited conduct in the wholesale electricity market

2.77               The third category of prohibited conduct created by the Bill relates to the wholesale market, and specifically any spot market for the supply of electricity. This category seeks to prevent generators engaging in conduct which undermines the effective operation of the electricity spot market. [Schedule 1, item 1, sections 153G and 153H]

2.78               The rules for the wholesale market category of prohibited conduct are similar to those existing under rule 542 of the National Gas Rules.

2.79               The Treasurer may make a contracting order, or apply to the Court for a divesture order, in relation to an aggravated case of a breach of the wholesale conduct prohibition. Contacting orders and court ordered divestiture are not available for a breach of the basic wholesale conduct prohibition. The contracting order remedy is detailed in Chapter 4 and court ordered divestiture is detailed in Chapter 5. The other available remedies are detailed in Chapter 3.

What is prohibited conduct relating to electricity spot markets?

2.80               The Bill provides for two cases of prohibited conduct relating to electricity spot markets: a basic case and an aggravated case. Where the basic case is met, an ACCC response, but not a Treasurer response, can be applied to remedy the conduct. [Schedule 1, item 1, subparagraphs 153W(e)(ii) and 153ZA(e)(ii)]

2.81               Where the aggravated case is met, a Treasurer response as well as an ACCC response can be applied. Each case has two elements that must be present for the prohibition to apply.

First element - spot market behaviour

2.82               The first element is the same for both cases. It describes the kind of activities that may result in prohibited conduct. They are that the corporation either:

•        bids or offers to supply electricity on an electricity spot market; or

•        fails to bid or offer to supply electricity on such a market.

[Schedule 1, item 1, paragraphs 153G(a) and 153H(a)]

2.83               This is intended to cover all forms of bidding behaviour on a spot market, including initial bidding, re-bidding (whereby initial bids are re-submitted), or failing to bid.

2.84               The concept of a failure to bid or offer to supply electricity is intended to capture conduct occurring in relation to a spot market that results in bids or offers not being made, such as decisions about whether or when to partially or wholly power down a generating unit.

Second element -purpose of behaviour

2.85               Both the basic and aggravated cases look to whether the behaviour covered by the first element has a particular character or purpose. In the basic case, the prohibited conduct will be made out where either of these limbs is present:

•        the corporation has acted fraudulently, dishonestly or in bad faith in carrying out the behaviour; or

•        the behaviour has been carried out for the purpose of distorting or manipulating prices in the electricity spot market.

[Schedule 1, item 1, paragraph 153G(b)]

2.86               In the aggravated case, both of those limbs must be present for the prohibited conduct to be made out. [Schedule 1, item 1, paragraph 153H(b)]

2.87               The reason for having two cases of prohibited conduct under the wholesale spot market category is to ensure that an appropriate response can be applied to the prohibited conduct. The aggravated case captures more serious behaviour, and it is therefore appropriate that such cases create the possibility of the more significant remedies and responses.

What is an electricity spot market?

2.88               The meaning of electricity spot market is discussed above at paragraphs 2.65 to 2.69.

When does a corporation act fraudulently, dishonestly or in bad faith?

2.89               In essence, 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.

2.90               In making bids or rebids, or choosing not to bid, generators make representations or provide information to the market. For example, in placing a bid, a generator is representing to the market that it intends to dispatch a certain quantity of electricity at a certain price. If, at the time of placing the bid, the generator does not intend to honour its bid, placing of that bid is likely to be considered dishonest and an act of bad faith.

When does a corporation act for the purpose of distorting or manipulating prices?

General principles about distortion or manipulation of prices

2.91               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.

2.92               In an electricity spot market, prices generally fluctuate in line with the supply and demand balance as well as fluctuations in the costs of other inputs (for example, fuel costs), but in the long run should reflect a market operating with effective competitive constraint.

2.93               The features of effective competition in an electricity spot market are:

•        active competitors in the market with a sustainable position (rather than just the threat of new entrants);

•        low barriers to entry to the market for new competitors; and

•        prices largely determined in the long term by underlying costs rather than the existence of market power.

2.94               Where these features, particularly the last feature, are substantially negated or dampened by the deliberate actions of a corporation, prices would no longer reflect an effective competitive outcome and would be distorted or manipulated.

2.95               Prices would not be considered distorted or manipulated merely because they are changed as a result of a corporation’s behaviour. Generators may make many bids each day, and the fact that these bids alter spot prices is not of itself distortion or manipulation in the relevant sense.

2.96               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.

2.97               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 manipulating prices. This depends on the specific facts of the case.

Design features of an energy only spot market

2.98               It is important that the analysis of whether a corporation acted with the purpose of distorting or manipulating prices be made with reference to the particular design of electricity spot markets.

2.99               Transitory market power can be an acceptable feature of an electricity spot market because it can create a signal for investors to invest in new generation when and where it is needed by the system. When investors observe transitory market power in action, they are more likely to invest to bring new generation into the market to take advantage of the opportunity, which then helps to drive prices back to reflect underlying costs.

2.100           Similarly, the design of the spot market allows for price spikes. Short-term price spikes, generally in response to rare peak events, allow for peaking capacity (with higher start-up and operating costs) to remain viable, without requiring new generation to be brought into the system unnecessarily at a cost to consumers.

Example 2.15 

Generator A operates a ‘peaking plant’, which has high fixed capital costs and high operating costs and is able to quickly increase and decrease its output. For most of the year, Generator A does not bid capacity in to the spot market. Generator A waits for price spikes to occur, and bids in to take advantage of those price spikes. During those brief spikes, Generator A needs to receive a price which covers both its operating and fixed capital costs, in order to remain viable in the long term. Generator A’s bidding strategy is what would reasonably be expected of a peaking plant operating in an energy only spot market.  

Generator A’s failure to bid does not have the purpose of distorting or manipulating prices, as it seeks to take advantage of naturally occurring high prices but has not caused those high prices. Generator A’s behaviour is not fraudulent, dishonest or in bad faith. Generator A has not contravened section 153G or 153H.

2.101           Generators are also able to undertake strategies to optimise their operation, which may also factor in to the price at which a generator bids in to the market, the amount of capacity they bid in, or a decision not to bid in on a particular occasion.

2.102           On occasion, generators may engage in economic rationing, that is, choosing not to bid in to the market at a particular point in time, as a generator may have limited fuel and an expectation that prices will be higher in the future. Different generation types would be expected to display different bidding profiles and have different optimisation strategies. Similarly, the bidding profile and optimisation strategy of a standalone generator may be different to that of a gentailer with a diversified generation portfolio.

Example 2.16 

Generator B operates a large coal-fired power station. The plant has high start-up costs and takes 6-7 hours to ‘ramp up’ to its full operating capacity. Generator B’s operating costs are $60 per megawatt hour, but Generator B will bid in at $30 per megawatt hour if necessary to ensure it is dispatched and able to operate constantly. In ensuring it is constantly operating, Generator B is ready to respond to a period of significantly higher prices when supply and demand are tighter, without incurring the high start-up costs. At these times, Generator B bids in at higher prices and is able to recoup its overall operating costs. This is the most efficient way for Generator B to operate.

Generator B’s bidding below cost does not have the purpose of distorting or manipulating prices, as it is simply an optimisation strategy that would reasonably be expected of a particular plant operating in an energy only spot market. Generator B has not contravened section 153G or 153H.

2.103           Bidding and optimisation strategies generally seek to recover a generator’s efficient costs over time, and may change in response to various market signals such as forecast supply and demand balances.

Example 2.17 

Generator C operates a large coal-fired power station. At the start of spring, Generator C evaluates its coal supplies and determines that it has a limited supply of coal, an insufficient amount to allow it to generate at high capacity throughout both spring and summer. Generator C could use its coal now, when prices are lower, and have no coal left to take advantage of higher prices in summer. During spring, Generator C bids in at higher than usual prices, to ensure it continues to be dispatched but at much lower capacity. Generator C then bids in significantly higher capacity during summer.

Generator C’s behaviour of bidding higher than expected during Spring does not have the purpose of distorting or manipulating prices, as it is economic rationing which would reasonably be expected of a generator with limited fuel supplies. Generator C has not contravened section 153G or 153H.

2.104            These are considered acceptable features of the electricity spot market, and part of the efficient operation of the spot market and its participants. Sections 153G and 153H are not intended to interfere with behaviour which is genuine commercial behaviour as intended by the design of the electricity spot market.

Nature of the purpose test

2.105           As with the purpose test under the contract market liquidity category of prohibited conduct, the purpose test relating to the manipulation or distortion of prices on a spot market requires an objective assessment of the substantial purpose of the corporation, having regard to all relevant facts and circumstances (see paragraph 2.76).

Example 2.18 

Generator D operates three power plants, making up a significant amount of the available capacity in a network region. On a hot summer day, electricity demand is at its peak and the system is under strain. Generator D decides to undertake discretionary maintenance on one of its power plants, and takes that power plant offline for the day. Generator D could have undertaken the maintenance on a different day, but knew that if it took one plant offline on this particular day, prices would spike and the other two plants would make more revenue than if all three plants were operating.

Generator D is likely to have engaged in behaviour with the purpose of distorting or manipulating prices, in breach of section 153G.

Example 2.19 

Generator E bids in significant capacity at a relatively low price, for an off-peak dispatch period, one day in advance. Other generators do not bid in for this dispatch period, as they can’t match or beat Generator E’s bid.

Just before the dispatch period, Generator E shifts its bid to a significantly higher price band. When the rebid happens, the other generators are unable to respond because they have made operational decisions in response to the original bid. As a result, Generator E is dispatched at a much higher price than would otherwise have occurred.

Rebidding in response to a change in market conditions is permissible. However, at the time of placing its original bid, Generator E never intended to honour its original bid and had planned on rebidding at the last moment. It is likely Generator E would be considered to have acted fraudulently, dishonestly or in bad faith in placing its original bid. Further, Generator E’s conduct had the purpose of distorting or manipulating prices. Generator E is likely to have engaged in behaviour which breaches both section 153G and 153H.

Prohibited conduct in corporate groups

2.106           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.

2.107           A corporation within a corporate group may engage in conduct that is prohibited conduct under the Bill. In doing so, it may deal with, or use assets held by, other companies in the same group. A Treasurer’s contracting order or a court ordered divestiture may need to operate in relation to assets held, or things to be done, by those other companies, including where they are acting in the capacity of trustee.

2.108           To achieve this, the Bill provides that certain body corporates may be subject to a Treasurer’s contracting order or a court ordered divestiture if they are related to a corporation that engages in prohibited conduct. These body corporates do not themselves need to be corporations as defined in the CCA. But they do need to be engaged in certain dealings with, or their assets need to be used by, the corporation actually engaging in the prohibited conduct. Alternatively they need to be the holding company of such a corporation or body corporate.

2.109           The Bill creates a concept of a connected body corporate in relation to prohibited conduct. If an entity is such a connected body corporate, it may become subject to a Treasurer’s response, as discussed in Chapters 4 and 5, and may receive, or be named in, a prohibited conduct notice and recommendation (see Chapter 6). [Schedule 1, item 1, section 153C, definition of ‘connected body corporate’)]

2.110           Three categories of entity may be a connected body corporate in relation to prohibited conduct.

First category - corporation actually engaging in prohibited conduct

2.111           A ‘corporation’, as defined in subsection 4(1) of the CCA, is a connected body corporate in relation to prohibited conduct actually engaged in by that corporation. [Schedule 1, item 1, subsection 153D(1)]

Second category - group company associated with prohibited conduct

2.112           A body corporate is a connected body corporate in relation to prohibited conduct engaged in by a corporation if:

•        the body corporate is ‘related’ to the corporation (within the meaning of subsection 4A(5) of the CCA); and

•        either the prohibited conduct involves direct or indirect dealings between the body corporate and the corporation engaging in that conduct or the direct or indirect use of assets held by the body corporate.

[Schedule 1, item 1, subsection 153D(2)]

2.113           A body corporate covered by this category does not need to be a ‘corporation’ as defined in subsection 4(1) of the CCA.

2.114           This category of company needs to be treated as a connected body corporate because it may hold assets (for example, electricity generation assets) that should be subject to a court ordered divestiture or it may be an arm of the corporate group that should be subject to a Treasurer’s contracting order.

2.115           The term ‘dealings’ includes all kinds of dealings including entering into contracts, arrangements or understandings.

2.116           Two group companies would deal with each other ‘indirectly’ where the dealings are conducted through interposed entities (such as other group companies) and via intermediaries. A similar principle applies to the indirect use of assets.

Third category - holding company

2.117           A body corporate is a connected body corporate in relation to prohibited conduct engaged in by a corporation if it is a ‘holding company’ (within the meaning of subsection 4A(4) of the CCA) of another body corporate that is a connected body corporate in relation to that prohibited conduct. That would be the case where the body corporate is a holding company of:

•        the corporation actually engaging in the prohibited conduct (the first category of connected body corporate); or

•        a body corporate associated with the prohibited conduct in the defined way (the second category of connected body corporate); or

•        a body corporate that is itself a holding company by a previous application of section 153D.

[Schedule 1, item 1, subsection 153D(3)]

2.118           A body corporate covered by this category also does not need to be a ‘corporation’ as defined in subsection 4(1) of the CCA.

2.119           This category of company needs to be treated as a connected body corporate because it may hold shares in another group company (for example, one that holds electricity generation assets) that should be subject to a court ordered divestiture.

Example 2.20 - How the connected body corporate rules apply

Parent Co Ltd is a publicly listed corporation that is the holding company of a corporate group carrying on a vertically integrated energy business. The group contains a number of wholly owned companies.

Wholesale Pty Ltd, a subsidiary of Parent Co Ltd, bids to supply electricity to an electricity spot market. However, the assets that generate the electricity for which the bids are made are owned by Generation Asset No. 1 Pty Ltd, an indirectly owned subsidiary of Parent Co Ltd (via Generation Holdings Pty Ltd). Wholesale Pty Ltd contracts with Generation Asset No. 1 Pty Ltd in relation to those generation assets.

Wholesale Pty Ltd engages in conduct that is prohibited under section 153H, by bidding in bad faith for the purpose of distorting or manipulating prices in the spot market.

This diagram illustrates the group structure and the connections between group companies.

Wholesale Pty Ltd is a connected body corporate in relation to the prohibited conduct because it has actually engaged in it.

Generation Asset No. 1 Pty Ltd is a connected body corporate in relation to the prohibited conduct engaged in by Wholesale Pty Ltd. That is because:

•        it has contracted with Wholesale Pty Ltd in relation to the supply of electricity to which the prohibited conduct relates (and its generation assets have also been used to produce the electricity); and

•        it is related to Wholesale Pty Ltd under subsection 4A(5) of the CCA.

In addition:

•        Generation Holdings Pty Ltd is a connected body corporate in relation to the prohibited conduct because it is a holding company of Generation Asset No. 1 Pty Ltd; and

•        Parent Co Ltd is a connected body corporate in relation to the prohibited conduct because it is the holding company of Wholesale Pty Ltd (and also because it is the holding company of Generation Holdings Pty Ltd).

As a consequence, the Federal Court could make a divestiture order requiring one of the following:

•        Generation Asset No. 1 Pty Ltd to dispose of some or all of its electricity generation assets;

•        Generation Holdings Pty Ltd to dispose of its shares in Generation Asset No. 1 Pty Ltd;

•        Parent Co Ltd to dispose of its shares in Generation Holdings Pty Ltd.



Chapter 3          

ACCC responses

Outline of chapter

3.1                   This Chapter explains the remedies the ACCC may use if it reasonably believes a corporation has engaged, or is engaging, in prohibited conduct in the electricity sector. It also explains some amendments to the CCA relating to the operations of the ACCC.

Context of amendments

3.2                   A range of responses are available to respond to a corporation that the ACCC reasonably believes has engaged or is engaging in prohibited conduct.

3.3                   The graduated responses available to the ACCC provide flexibility to enable the ACCC to respond appropriately to the alleged prohibited conduct that is identified. More serious cases may warrant consideration of a Treasurer response (detailed in Chapters 4 and 5 below).

Summary of new law

3.4                   If the ACCC reasonably believes that a corporation has engaged, or is engaging in prohibited conduct, it may:

•        issue a public warning notice;

•        issue an infringement notice;

•        accept a court enforceable undertaking from the corporation;

•        apply to a court for an injunction;

•        apply to a court for a pecuniary penalty.

Detailed explanation of new law

3.5                   The range of responses available to the ACCC if it reasonably believes that a corporation has engaged, or is engaging, in prohibited conduct are set out below.

3.6                   The prohibited conduct provisions set out in Division 2 of Part XICA do not limit the operation of other provisions of the CCA that may also apply in respect of a corporation’s conduct. [Schedule 1, item 1, section 153K]

3.7                   The Treasurer is not permitted to direct the ACCC in respect of its functions under Part XICA. [Schedule 1, item 5, paragraph 29(1A)(a)]

Public warning notices

3.8                   The ACCC may issue a public warning notice to a corporation for engaging in prohibited conduct after providing the corporation with an opportunity to make representations in relation to specified matters including the alleged conduct.

Public warning notice procedure

Draft notice

3.9                   The ACCC may give a corporation a draft public warning notice in writing if it reasonably believes that:

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

•        the conduct has resulted in, or is likely to result in, detriment to a person or persons; and

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

[Schedule 1, item 1, subsection 153L(1)]

3.10               The notice must identify the alleged prohibited conduct and explain the reasons why the ACCC reasonably believes that the corporation has engaged in the prohibited conduct, that the conduct has resulted in detriment or likely detriment to one or more persons, and that it is in the public interest to issue the notice. [Schedule 1, item 1, paragraphs 153L(2)(a), (b) and (c)]

3.11               The corporation has 21 days to make representations to the ACCC regarding the prohibited conduct, the detriment identified, and whether it is in the public interest to publish the notice. [Schedule 1, item 1, paragraph 153L(2)(d)]

3.12               A draft notice is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 . [Schedule 1, item 1, subsection 153L(3)]

Final notice

3.13               The ACCC may issue a public warning notice if 21 days have passed after issuing a draft notice and the ACCC still reasonably believes:

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

•        the conduct has resulted in, or is likely to result in, detriment to a person or persons; and

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

[Schedule 1, item 1, subsections 153M(1) and (2)]

3.14               The public warning notice cannot be issued if more than 90 days have passed since the ACCC gave the corporation the draft notice. [Schedule 1, item 1, paragraph 153M(1)(c)]

3.15               The public warning notice must state the date of issue and identify the corporation and prohibited conduct. [Schedule 1, item 1, subsection 153M(3)]

3.16               A public warning notice is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003 . [Schedule 1, item 1, subsection 153M(4)]

‘Reasonably believes’

3.17               The provisions require the ACCC to form a reasonable belief of the matters detailed above. This is the standard ‘reasonable belief’ test that requires both an objective and subjective assessment of the belief held.

Infringement notices

3.18               The ACCC may issue an infringement notice to a corporation if it has reasonable grounds to believe that the corporation has contravened a prohibited conduct provision. [Schedule 1, item 1, subsection 153N(1)]

3.19               The amendments apply the existing infringement notice provisions in Division 5 of Part V of the CCA (existing sections 60L, 60M, 60N, 60P, 60Q and 60R) to an alleged contravention of the prohibited conduct provisions (new sections 153E, 153F, 153G and 153H).

3.20               The existing framework provides that, inter alia , the infringement notice must be issued within 12 months of the alleged contravention, and cannot relate to more than one alleged contravention (see subsection 60L(3)).

3.21               The penalty for an infringement notice issued to a corporation in respect of the prohibited conduct provisions is 600 penalty units. [Schedule 1, item 1, subsection 153N(2)]

3.22               The corporation has 28 days to pay the infringement notice, which may be extended once by the ACCC for a further 28 days (see section 60P).

3.23               If a corporation pays the infringement notice within the compliance period, the ACCC cannot take any further court action in relation to the alleged contravention in the infringement notice (see section 60M). If the corporation does not pay the infringement notice, the ACCC may institute proceedings (under Part VI of the CCA) for contravention of the prohibited conduct provisions (see section 60N).

Court enforceable undertakings

3.24               The ACCC may accept a court enforceable undertaking from a corporation in respect of the matters in the new Part XICA of the CCA.

3.25               The ACCC’s existing powers and processes in respect of written undertakings (see section 87B) apply automatically to the new Part XICA.

Injunctions

3.26               The ACCC may apply to a court for an injunction to stop (or otherwise direct) a corporation that has engaged in or is engaging in prohibited conduct. A court can grant an injunction on the terms that it determines to be appropriate.

3.27               The amendments extend the existing enforcement provisions regarding injunctions to the new Part XICA. [Schedule 1, items 8 and 9, subparagraphs 80(1)(a)(iv) and 80(1)(a)(v)]

Pecuniary penalties

3.28               The ACCC may apply to a court for a pecuniary penalty in respect of contraventions of the prohibited conduct provisions.

3.29               The amendments extend the existing pecuniary penalty provisions to the new Part XICA. [Schedule 1, item 6, subparagraph 76(1)(a)(iiia)]

3.30               In certain circumstances individuals who have been involved in contraventions of the prohibited conduct provisions may also be liable for a pecuniary penalty.

3.31               The amendments limit the liability for pecuniary penalties to directors, secretaries or senior managers of the corporation:

•        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 engage in prohibited conduct; or

•        who have conspired with others for a corporation to engage in prohibited conduct. [Schedule 1, item 1, section 153ZD]

3.32               Directors, secretaries and senior managers are defined in the Corporations Act 2001 . [Schedule 1, item 1, section 153ZD]

3.33               The maximum penalty that a corporation can be subject to is the greatest of the following:

•        $10,000,000;

•        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 conduct - 3 times that value; and

•        if the Court cannot determine the total value of the benefits that have been obtained - 10 per cent of the annual turnover of the body corporate during the 12 months prior to the conduct occurring.

[Schedule 1, items 6 and 7, subparagraph and paragraph 76(1)(a)(iiia) and 76(1A)(aa)]

3.34               The maximum penalty that an individual can be subject to is $500,000 [Schedule 1, item 1, subparagraph 76(1)(a)(iiia) and paragraph 76(1B)(b)]

3.35               In determining the appropriate penalty amount, the Court will have regard to all relevant matters including the nature of the conduct and the circumstances in which the conduct took place.

3.36               Under the existing penalty provisions, where a corporation has been ordered to pay a pecuniary penalty, the ACCC may apply for the Court to make an adverse publicity order (see section 86D). An adverse publicity order is an order that requires the corporation to disclose and publish particular information to certain persons as specified. These provisions apply automatically to the new Part XICA.

Information gathering powers

3.37               The ACCC’s existing powers to obtain information, documents and evidence under section 155 of the CCA will apply for the purposes of the ACCC performing its functions under new Part XICA. The Bill also amends section 155 to ensure that the ACCC has the ability to adequately investigate compliance with any orders that may be made (see Chapters 4 and 5). [Schedule 1, item 12, subparagraphs 155(2)(b)(vi) and (vii)]

Secrecy

3.38               Information that relates to matters in Part XICA is protected information for the purposes of the CCA, which means that the ACCC may only disclose it in limited circumstances. [Schedule 1, item 13, subsection 155AAA(21), paragraph (a) of the definition of ‘core statutory provision’]



Chapter 4          

Treasurer’s c ontracting order s

Outline of chapter

4.1                   This Chapter explains the provisions in Division 5 of new Part XICA that set out the procedures that must be followed for:

•        the making and enforcement of a Treasurer’s contracting order on a corporation or other body corporate to address alleged prohibited conduct; and

•        varying or revoking a Treasurer’s contracting order.

Summary of new law

4.2                   Following the receipt of a prohibited conduct recommendation from the ACCC, the Treasurer can issue a written order to the corporation or another body corporate identified in that recommendation and order it to make offers to enter into electricity financial contracts with third party entities.

Detailed explanation of new law

4.3                   Following the receipt of a prohibited conduct recommendation from the ACCC, the Treasurer may, in writing, order the corporation or other body corporate identified in that recommendation to make offers to enter into electricity financial contracts with third party entities (called a ‘contracting order’).

4.4                   This order is part of the suite of responses that can be used to remedy alleged prohibited conduct engaged in by corporations.

4.5                   A contracting order will essentially require vertically integrated electricity businesses (‘gentailers’) to make contracts available to third parties.

4.6                   A contracting order can be used as a means of remedying prohibited conduct under the financial contract liquidity and wholesale market (aggravated case) categories.

When can the Treasurer make a contracting order?

4.7                   The Bill sets out the circumstances in which the Treasurer can make a contracting order. The making of such an order will follow the ACCC notice and recommendation procedure, which may culminate in a recommendation to the Treasurer that he or she make a contracting order (see Chapter 6). [Schedule 1, item 1, section 153C, definition of ‘contracting order’]

4.8                   The Treasurer can make a contracting order in respect of a body corporate if he or she is satisfied that all these conditions are met:

•        the ACCC has given a prohibited conduct recommendation to the Treasurer ;

•        the body corporate is identified in the ACCC’s recommendation;

•        the order is being made no later than 45 days after the ACCC gave the Treasurer the recommendation, or varied recommendation (a prohibited conduct notice provided by the ACCC to the Treasurer could be varied, in which case the 45 days for Treasurer consideration of the recommendation would start from the time of the variation - see Chapter 6);

•        the order is of a kind that was stated in the ACCC’s recommendation to the Treasurer;

•        the conduct identified in the ACCC recommendation is prohibited conduct by the corporation specified in the recommendation;

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

[Schedule 1, item 1, section 153W]

4.9                   The Treasurer can only make a contracting order where the prohibited conduct in question arises under section 153F (electricity financial contract liquidity) or section 153H (electricity spot market (aggravated case)) in the new Part XICA. [Schedule 1, item 1, subparagraph 153W(e)(ii)]

Which body corporates can be subject to a Treasurer’s contracting order?

4.10               The body corporate upon which a Treasurer’s contracting order is imposed could be the corporation that has actually engaged in the prohibited conduct. Alternatively, it could be another connected body corporate in relation to the prohibited conduct. That would be another company in the corporate group that has been involved in some way with the corporation in relation to the prohibited conduct, or a relevant holding company (see discussion at paragraphs 2.106 to 2.119 above). It is possible that an ACCC prohibited conduct recommendation might recommend orders against more than one connected body corporate in relation to prohibited conduct engaged in by a corporation.

When is an order ‘of a kind’ stated in a prohibited conduct recommendation?

4.11               A Treasurer’s contracting order needs to be ‘of a kind’ recommended by the ACCC. For that to be the case, the Treasurer can only make a contracting order if the ACCC has recommended a contracting order. However, the specifics of the order do not need to be identical to that recommended by the ACCC.

4.12               For example, a contracting order made by the Treasurer against a body corporate would be of the same kind as that recommended by the ACCC if the ACCC recommended a contracting order against that body corporate or a connected body corporate in relation to the prohibited conduct covered by the recommendation. However, the particular matters covered by the Treasurer’s contracting order (for example, the periods to which the order should apply) do not need to be identical to those recommended by the ACCC.

When is an order a proportionate means of preventing future prohibited conduct?

4.13               To make a contracting order, the Treasurer must be satisfied that the order is a proportionate means of preventing the corporation that engaged in the prohibited conduct, or a related body corporate, from engaging in that kind of conduct in the future. Proportionality requires that the overall order is necessary to prevent that kind of conduct from continuing or re-occurring in the future, and that a lesser remedy would not achieve this. That means that the Treasurer must be satisfied that the order does not require things to be done that are not necessary to prevent the body corporate from engaging in the kind of prohibited conduct in the future.

4.14               This requirement refers to preventing ‘related’ body corporates from engaging in prohibited conduct in the future to ensure that other members of the offending corporation’s corporate group do not engage in that kind of prohibited conduct in the future.

4.15               Conduct will be of the same kind as other prohibited conduct if it would be prohibited under the same provision in Division 2 of Part XICA (see Chapter 2). For example, if a corporation engaged in conduct covered by a recommendation to the Treasurer that was prohibited under the electricity financial contract liquidity category in section 153F, the Treasurer’s contracting order should be a proportionate means of preventing any future prohibited conduct in that category.

What is a contracting order?

4.16               The Treasurer may, in writing, order a body corporate to enter into electricity financial contracts. [Schedule 1, item 1, section 153C, definition of ‘contracting order’, and subsection 153X(1)]

4.17               An electricity financial contract is generally a derivative contract designed to hedge exposure to electricity spot market prices (see discussion of the meaning of that term in Chapter 2).

4.18               The written contracting order must:

•        state that it is made under section 153X and the day on which it is made;

•        identify the prohibited conduct to which the order relates;

•        identify the body corporate that must comply with the order and the corporation that has engaged in the prohibited conduct (if that is a different body corporate);

•        explain the reasons for the Treasurer being satisfied that the conditions for the making of the order are met; and

•        specify details about what the order requires (referred to as ‘matters’).

[Schedule 1, item 1, subsection 153X(2)]

4.19               A contracting order must specify these matters:

•        the kind of offers to enter into electricity financial contracts that the body corporate must make;

•        the manner in which the body corporate must make those offers;

•        the kinds of entities to which those offers must be made;

•        the period or periods during which the offers must be made; and

•        any other matters the Treasurer considers necessary for the order to be effective.

[Schedule 1, item 1, subsection 153X(3)]

What are the kinds of offers that must be made under a contracting order?

4.20               The Bill sets out the ways in which a contracting order can specify the kinds of electricity financial contract that the body corporate must offer. These may cover:

•        the type of electricity financial contract (that is, the specific type of derivative contract);

•        the price or range of prices for the electricity covered by the derivative contract; and

•        the minimum number of megawatt hours of electricity that must be offered.

[Schedule 1, item 1, subsection 153X(4)]

4.21               There are a range of electricity financial contracts (such as caps and swaps) that a body corporate could be required to offer (as identified in Chapter 2). The particular type of electricity contract that would be specified will depend upon the individual facts and circumstances of the case.

4.22               For example, under a base load swap contract, the parties lock in the price for a fixed amount of electricity at all times of the day to hedge against the fluctuating spot price of electricity. Under a contracting order requiring a base load swap contract, the body corporate could be obliged to offer contracts that lock in the price of electricity. Under a flat cap contract, one party to the contract has the ability to purchase a given amount of electricity from the counterparty at an agreed fixed price. This would generally be where the spot price of electricity is higher than the agreed fixed price in the contract. Under a contracting order requiring a flat cap contract, the body corporate must offer contracts where they could be the counterparty required to sell the given amount of electricity at the agreed fixed price.

4.23               The price or the range of prices for the electricity to be paid under the particular electricity financial contract will depend upon the individual facts and circumstances of the connected body corporate subject to the order. It may be necessary to specify a price or range of prices to ensure the connected body corporate cannot circumvent the order by making offers at prices well above their market value, such that no reasonable counterparty would be likely to accept the offers.

4.24               In determining the minimum number of megawatt hours, the Treasurer must have regard to the following matters:

•        the total electricity generation capacity of the generation assets held by the corporate group;

•        the nature and location of the electricity generation assets;

•        the existing commitments to supply electricity to the customers of the corporate group; and

•        any other matter the Treasurer considers to be relevant.

[Schedule 1, item 1, subsection 153X(5)]

4.25               Consideration of the total electricity generation capacity of the generation assets held by each relevant body corporate related to the prohibited conduct ensures that the minimum number of megawatt hours specified in the contracting order is proportionate to the total generation capacity of the body corporates involved.

4.26               The Treasurer would need to have regard to the operating capacity and characteristics of particular generation assets, not just their nameplate capacity. For example, ageing plants with declining reliability are often unable to operate at their full nameplate capacity. Therefore, in determining the minimum number of megawatt hours, the Treasurer would need to have regard to operational management considerations of the body corporate and its corporate group, such as managing the risks of unplanned outages and maintenance requirements.

4.27               Consideration of the nature and location of those electricity generation assets reflects that the body corporate’s generation assets may vary widely in terms of their type and operational characteristics (such as baseload, peaking or intermittent generators). For example, a body corporate’s generation assets may only be able to produce electricity intermittently, depending on their location or the time of day.

4.28               Consideration of the existing commitments to supply electricity to the retail customers of the corporate group ensures that the Treasurer must consider a retailer’s ability to continue to supply electricity to its own customers (that is, their retail load) , despite a contracting order.

4.29               Connected body corporates may have a wide range of available generation capacity and different types of generation assets that could be related to a contracting order. Therefore, the Treasurer must have regard to the list of factors in light of the individual circumstances of each case in determining the minimum number of megawatt hours that the contracting order should specify.

4.30               In order to comply with the order, a body corporate must offer the electricity financial contracts over the period or periods stated in the order. The period must start after six months from the date the order is made and end no later than three years after the order is made. [Schedule 1, item 1, subsection 153X(6)]

4.31               The Treasurer must make public the fact that the contracting order has been made, the day on which the order was made, and the name of the body corporate. The details of the order are not to be published. [Schedule 1, item 1, subsection 153X(7)]

Variation or revocation of Treasurer’s contracting orders

4.32               A contracting order may be varied or revoked in writing by the Treasurer either on the Treasurer’s own initiative or on application made by the body corporate. [Schedule 1, item 1, subsection 153Y(1)]

4.33               The Treasurer can make a variation of a contracting order in respect of a body corporate if he or she is satisfied that all these conditions are met:

•        the order as varied is a proportionate means of preventing the relevant corporation, or a related body corporate, from engaging in that kind of prohibited conduct in the future; and

•        if the body corporate does not consent to the variation, a variation can only be made if the variation is minor or insubstantial (for example, to correct typographical or minor errors) or the Treasurer is satisfied that:

-       the corporate or any related body corporate gave the Treasurer or the ACCC information that was false or misleading in a material particular or failed to give relevant information that is not publicly available; and

-       the variation is reasonably necessary to address the type of misinformation provided to the Treasurer or the ACCC.

[Schedule 1, item 1, subsection 153Y(2)]

4.34               Generally, the Treasurer can make variations to a contracting order if the body corporate consents to the variation. This could be where the changes would advantage the body corporate.

4.35               In the event that the body corporate does not consent to the variation, paragraph 153Y(2)(b) sets out two situations in which the Treasurer can vary a contracting order.

4.36               In the first situation, this would allow the Treasurer to make variations to correct minor or insubstantial errors made in the order.

4.37               In the second situation, the variation allows for changes which could disadvantage the body corporate. However, these are justified because the changes must be as a result of the corporation giving false or misleading information in a material particular or omitting to give relevant information to the ACCC or the Treasurer.

4.38               A variation can be of a kind that results in the Treasurer’s contracting order, as varied, being different to the kind recommended in the prohibited conduct recommendation (in accordance with paragraph 153S(2)(d) of new Part XICA). [Schedule 1, item 1, subsection 153Y(3)]

4.39               The Treasurer does not need to consider an application by the body corporate to vary or revoke an order if the application is made after the end of the period in which the body corporate must comply with the order. If a contracting order contains more than one period to comply, then it is taken to be when all the periods have ended. [Schedule 1, item 1, subsection 153Y(4)]

4.40               The Treasurer must make public information relating to the varied or revoked contracting order electronically or by any other means. [Schedule 1, item 1, subsection 153Y(5)]

4.41               The information that must be published is:

•        the fact that the contracting order has been varied or revoked;

•        the name of the corporation that is named in the contracting order; and

•        the day on which the contracting order was varied or revoked.

Other details relating to the variation or revocation are not be made public.

[Schedule 1, item 1, subsection 153Y(5)]

Enforcement of Treasurer’s contracting orders

4.42               The Bill includes a provision to enable a Treasurer’s contracting order to be enforced by the Federal Court. This is necessary because ultimately only a court can require the necessary action to be taken by a body corporate subject to a Treasurer’s contracting order.

4.43               Under the enforcement provision, the ACCC can apply to the Federal Court for court orders seeking compliance with a Treasurer’s contracting order. The ACCC can do that where it considers that the body corporate subject to the Treasurer’s contracting order has not complied with it. [Schedule 1, item 1, subsections 153Z(1) and (2)]

4.44               The Bill amends the ACCC’s information gathering power in section 155 of the CCA to ensure that the ACCC can gather information relevant to determining whether a body corporate has complied with a Treasurer’s contracting order. This may be necessary in order for the ACCC to decide whether an application to the Federal Court for enforcement is required. [Schedule 1, item 12, subparagraphs 155(2)(b)(vi)]

4.45               The new enforcement provision allows the Federal Court to make an order directing the body corporate to comply with a Treasurer’s contracting order. If the period or periods in any of the Treasurer’s contracting orders has already passed, the Federal Court can make an order directing the body corporate to comply with the Treasurer’s contracting order by a new period or periods specified in the order. The Federal Court can also make such other orders as it considers appropriate. [Schedule 1, item 1, subsection 153Z(3)]

Review of Treasurer’s contracting orders

4.46               A body corporate subject to a Treasurer’s contracting order can seek judicial review of the decisions made by the Treasurer under Division 5 through the standard avenues such as the Administrative Decisions (Judicial Review) Act 1977 and section 39B of the Judiciary Act 1903 .

Acquisition of property

4.47               To the extent that the operation of a provision in Division 5 in new Part XICA of the CCA or any other provision of the CCA to the extent that it relates to Division 5 would result in an acquisition of property from a person otherwise than on just terms within the meaning of section 51(xxxi) of the Constitution, the provision does not have any operation and the remainder of the CCA continues in operation. [Schedule 1, item 1, section 153ZC]



Chapter 5          

Court ordered divestiture

Outline of chapter

5.1                   This Chapter explains the provisions in Division 6 of new Part XICA that set out the procedures that must be followed for:

•        the Treasurer to apply to the Federal Court for a divestiture order; and

•        the Federal Court to make a divestiture order on a corporation or other body corporate.

Summary of new law

5.2                   Following the receipt of a prohibited conduct recommendation from the ACCC, the Treasurer may make an application to the Federal Court for a divestiture order.

5.3                   If the Federal Court is satisfied that the relevant requirements are met, the Federal Court can make an order to the corporation or another body corporate identified in the application and order it to dispose of interests in securities or assets that are part of its electricity business.

Detailed explanation of new law

5.4                   Following the receipt of a prohibited conduct recommendation from the ACCC, the Treasurer can apply to the Federal Court to make a divestiture order (called a ‘divestiture order application’).

5.5                   If the Federal Court is satisfied that the relevant requirements are met, the Federal Court can make an order to the corporation or another body corporate identified in the application and order it to dispose of interests in securities or assets that are part of its electricity business (called a ‘divestiture order’).

5.6                   This order is part of the suite of responses that can be used to remedy alleged prohibited conduct engaged in by corporations.

5.7                   A court ordered divestiture is intended to be used as a last resort in the most exceptional circumstances where other responses available to the ACCC and the Treasurer would not sufficiently address the alleged prohibited conduct. A divestiture order would only be an appropriate response where the Federal Court has found that the relevant corporation has engaged in prohibited conduct under section 153H (electricity spot market (aggravated case)).

When can the Treasurer apply to the Federal Court for a divestiture order?

5.8                   The Bill sets out the circumstances in which the Treasurer can apply to the Federal Court for a divestiture order to be imposed on a corporation or body corporate. The divestiture order application will follow the ACCC notice and recommendation procedure, which may culminate in a recommendation to the Treasurer that he or she apply to the Federal Court for a divestiture order (see Chapter 6). [Schedule 1, item 1, section 153C, definition of ‘divestiture order’]

5.9                   The Treasurer can apply to the Federal Court to make a divestiture order in respect of a body corporate if he or she is satisfied that all these conditions are met:

•        the ACCC has given a prohibited conduct recommendation to the Treasurer ;

•        the body corporate is identified in the ACCC’s recommendation;

•        the application is made no later than 45 days after the ACCC gave the Treasurer the recommendation, or varied recommendation (a prohibited conduct notice provided by the ACCC to the Treasurer could be varied, in which case the 45 days for Treasurer consideration of the recommendation would start from the time of the variation - see Chapter 5);

•        the order applied for is of a kind that was stated in the ACCC’s recommendation to the Treasurer;

•        the conduct identified in the ACCC recommendation is prohibited conduct by the corporation specified in the recommendation;

•        the order applied for is a proportionate means of preventing the corporation that engaged in the prohibited conduct, or a related body corporate, from engaging in that kind of prohibited conduct in the future;

•        the order applied for will, or is likely to, result in a public benefit that would, or would be likely to, outweigh any public detriment.

[Schedule 1, item 1, section 153ZA]

5.10               The Treasurer can only apply to the Federal Court for a divestiture order where the prohibited conduct in question arises under section 153H (electricity spot market (aggravated case)) in the new Part XICA. [Schedule 1, item 1, subparagraph 153ZA(e)(ii)]

When would an order be ‘of a kind’ stated in a prohibited conduct recommendation?

5.11               To apply to the Federal Court for a divestiture order, the Treasurer needs to be satisfied that such an order would be ‘of a kind’ recommended by the ACCC. That means that the Treasurer can only apply to the Federal Court for a divestiture order if the ACCC has recommended a divestiture order. However, the specifics of the order applied for do not need to be identical to that recommended by the ACCC.

5.12               For example, an application to the Federal Court for a divestiture order against a body corporate would be of the same kind as that recommended by the ACCC if the ACCC recommended a divestiture order against that body corporate or a connected body corporate in relation to the prohibited conduct covered by the recommendation.

When can the Federal Court make a divestiture order?

5.13               The Bill sets out the circumstances in which the Federal Court can make a divestiture order.

5.14               The Federal Court may, on the application of the Treasurer, make a divestiture order if the Federal Court is satisfied that the following conditions are met:

•        the Federal Court finds, or has in another proceeding instituted under the CCA found, that the conduct identified in the prohibited conduct recommendation is in fact prohibited conduct engaged in by the relevant corporation and is or includes prohibited conduct under section 153H (electricity spot market (aggravated case);

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

[Schedule 1, item 1, section 153C, definition of ‘divestiture order’, and subsection 153ZB(1)]

5.15               The Court must satisfy itself that the conditions for making the divestiture order, including that a contravention of section 153H has been found, have been met. For the avoidance of doubt, the Bill is not intended to affect ordinary Court practices and procedures that apply in the making of analogous orders, for example section 81 of the CCA.

Which body corporates can be subject to the Court’s divestiture order?

5.16               The body corporate upon which a Court’s divestiture order is imposed could be the corporation that has actually engaged in the prohibited conduct. Alternatively, it could be another connected body corporate in relation to the prohibited conduct. That would be another company in the corporate group that has been involved in some way with the corporation in relation to the prohibited conduct, or a relevant holding company (see discussion at paragraphs 2.106 to 2.119 above). It is possible that an ACCC prohibited conduct recommendation might recommend orders against more than one connected body corporate in relation to prohibited conduct engaged in by a corporation.

When is a divestiture a proportionate means of preventing future prohibited conduct?

5.17               The Treasurer, in applying for a divestiture order, and the Federal Court, in making such an order, must both be satisfied that the order is a proportionate means of preventing the corporation that engaged in the prohibited conduct, or a related body corporate, from engaging in that kind of conduct in the future. Proportionality requires that the overall order is necessary to prevent that kind of conduct from continuing or re-occurring in the future, and that a lesser remedy would not achieve this. That means that the Treasurer and the Federal Court must be satisfied that the order does not require things to be done that are not necessary to prevent the body corporate from engaging in the kind of prohibited conduct in the future.

5.18               This requirement refers to preventing ‘related’ body corporates from engaging in prohibited conduct in the future to ensure that other members of the offending corporation’s corporate group do not engage in that kind of prohibited conduct in the future.

5.19               Conduct will be of the same kind as other prohibited conduct if it would be prohibited under the same provision in Division 2 of Part XICA (see Chapter 2). For example, if a corporation engaged in conduct covered by a recommendation to the Treasurer that was prohibited under the electricity spot market (aggravated case) in section 153H, the divestiture order should be a proportionate means of preventing any future prohibited conduct in that category.

Net public benefit test

5.20               In applying to the Federal Court for the divestiture order, the Treasurer must also be satisfied that the divestiture order will, or is likely to, result in a public benefit that would, or would be likely to, outweigh any public detriment. This test is only relevant to the Treasurer’s consideration of whether to apply to the Federal Court for a divestiture order.

What is a divestiture order?

5.21               A divestiture order allows the Federal Court to order a body corporate to dispose of all or part of their interests in securities or assets. [Schedule 1, item 1, paragraph 153ZB(2)(a)]

5.22               The Federal Court can also impose upon the body corporate particular conditions which it must comply with to preserve the value of the security or asset or the commercial operation of the asset prior to its disposal. [Schedule 1, item 1, paragraph 153ZB(2)(b)]

5.23               A divestiture order must specify these matters :

•        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 body corporate must make the disposal; and

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

[Schedule 1, item 1, subsection 153ZB(5)]

5.24               The day by which the body corporate must dispose of the interests must be no earlier than 12 months from the day the divesture order is made. The Federal Court can allow for a longer period (than the minimum period of 12 months) for the body corporate to sell the assets. [Schedule 1, item 1, subsection 153ZB(6)]

5.25               A divestiture order could require that a body corporate dispose of its interests in the underlying tangible or intangible assets that it holds as part of its electricity business. Alternatively, a divestiture order could be issued to the holding company that holds an interest in the securities of the company or trust that holds the underlying tangible or intangible assets. In the second case, the divestiture order would direct the holding company to dispose of its interests in the securities in the company or trust.

What is an ‘interest’ in a security or an asset?

5.26               The Bill adopts the same definitions of interest in an asset, and interest in a security as in the Foreign Acquisitions and Takeovers Act 1975. [Schedule 1, item 1, subsection 153C, definition of ‘interest’]

5.27               A security is a share in a corporation or a unit in a unit trust. A person holds an interest in a security if they have any legal or equitable interest in that security. Therefore, a divestiture order may require that the body corporate must dispose of any of the legal or equitable interests it holds in the shares in a corporation or in the units in a unit trust.

5.28               A person holds an interest in an asset if they have any legal or equitable interest in that asset. Therefore, a divestiture order may require that the body corporate must dispose of any of the legal or equitable interests it holds in any assets it owns or leases.

Who can the disposal be made to?

Disposals by non-government body corporates

5.29               If the body corporate subject to the divestiture order is not an authority of the Commonwealth, State or Territory, the Court may order that it can dispose of the relevant interest to any entity that is not a body corporate that is related to it (within the meaning of subsection 4A(5) of the CCA) or is not an associate of the body corporate. Essentially, this requires the body corporate to make the disposal to an arm’s length third party purchaser. [Schedule 1, item 1, paragraph 153ZB(2)(a)]

5.30               The body corporate will need to ensure any disposal complies with other laws regulating acquisitions and disposals, such as section 50 of the CCA and the Foreign Acquisitions and Takeovers Act 1975 , as applicable.

Disposals by government authorities

5.31               If the body corporate subject to the divesture order is an authority of the Commonwealth, State or Territory, the Court may order that it dispose of the relevant interest to a body corporate that is an authority of the same government. For that to occur, the purchaser must genuinely be in competition in relation to electricity markets with the body corporate subject to the divestiture order. [Schedule 1, item 1, subsections 153ZB(3) and (4)]

5.32               This means that, if a divestiture order is made in respect of a government owned vendor body corporate, it can only allow a disposal to a purchaser body corporate owned or controlled by the same government. The Bill will not allow government owned electricity assets to be divested to any non-government entity.

What is an ‘associate’ of the body corporate?

5.33               The Bill adopts the definition of associate from the Foreign Acquisitions and Takeovers Act 1975 . [Schedule 1, item 1, subsection 153C, definition of ‘associate’]

5.34               The term associate is defined broadly. The following people are associates of a person:

•        a person’s ‘relative’ within the meaning given by the Income Tax Assessment Act 1997 ;

•        any person with whom the person is acting, or proposes to act, in concert in relation to an action to which the Foreign Acquisitions and Takeovers Act 1975 may apply;

•        any person with whom the person carries on a business in partnership;

•        any entity of which the person is a senior officer;

•        if the person is an entity, any holding entity and any senior officer of the entity;

•        any entity whose senior officers are accustomed to or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the person, or, if the person is an entity, the senior officers of the entity;

•        an entity if the person is accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the entity or the senior officers of the entity;

•        any corporation in which the person holds a ‘substantial interest’ (within the meaning of the Foreign Acquisitions and Takeovers Act 1975 );

•        if the person is a corporation, a person who holds a substantial interest in the corporation;

•        the trustee of a trust in which the person holds a substantial interest;

•        if the person is a trustee of a trust, a person who holds a substantial interest in the trust;

•        in particular circumstances for a person who is a foreign government.

5.35               Subject to the exception discussed in paragraph 5.31 above, a body corporate that is subject to a divestiture order must not dispose of its interest in the relevant security or asset to any persons who can be identified as an associate of the body corporate. If a body corporate does dispose of its interest to an associate, the body corporate would not have complied with the requirements of the divestiture order.

Conditions that can be imposed on the body corporate vendor

5.36               Under a divestiture order the Federal Court can specify that the body corporate must comply with specific conditions during the period between the day the order is made and the day of the disposal of the relevant interest. That can be done if the Federal Court is satisfied that the conditions are necessary to preserve:

•        the value of the interest; or

•        the commercial operation of an asset (if the interest is an interest in an asset).

[Schedule 1, item 1, subsection 153ZB(7)]

5.37               The conditions may relate to the interest to be disposed or if the interest is a share or other security in a body corporate, the exercise of rights attached to the share or other security. [Schedule 1, item 1, subsection 153ZB(8)]

5.38               The conditions imposed on the body corporate vendor are a safeguard to ensure that the asset being disposed of must continue to be properly maintained and operated in the ordinary course of business and ready for the future disposal to a third party.

5.39               Conditions are limited to those necessary to preserve the value or commercial operation of the interest or asset. For example, a condition may require the body corporate to adopt a particular accounting method, or appoint an independent director to maintain oversight over the operation of the business while the disposal is still pending.

Acquisition of property

5.40               To the extent that the operation of a provision in Division 6 in new Part XICA of the CCA or any other provision of the CCA to the extent that it relates to Division 6 would result in an acquisition of property from a person otherwise than on just terms within the meaning of section 51(xxxi) of the Constitution, the provision does not have any operation and the remainder of the CCA continues in operation. [Schedule 1, item 1, section 153ZC]



Outline of chapter

6.1                   This Chapter explains the provisions in Division 4 that set out the notice and recommendation procedures that must be followed before an order can be made in respect of a corporation or other body corporate.

Summary of new law

6.2                   Division 4 of new Part XICA of the CCA allows the ACCC to:

•        give a prohibited conduct notice to a corporation that the ACCC reasonably believes has engaged in certain kinds of prohibited conduct;

•        give a prohibited conduct recommendation to the Treasurer explaining the reasons why the ACCC believes the corporation has engaged in the prohibited conduct and making recommendations for the Treasurer to take further action; and

•        give a no Treasurer action notice to the Treasurer explaining that the ACCC considers that a prohibited conduct recommendation is not appropriate.

6.3                   There are restrictions on the kinds of prohibited conduct that can result in a divestiture or contracting order. The Treasurer may only make a contracting order in response to prohibited conduct in relation to the electricity financial contract market or the wholesale electricity market. Additionally, the Treasurer may only apply to the Federal Court for a divestiture order in response to prohibited conduct in relation to the wholesale electricity market.

6.4                   The provisions also set out when and how the ACCC may vary or revoke the prohibited conduct notice, prohibited conduct recommendation, or no Treasurer action notice.

Detailed explanation of new law

6.5                   Division 4 allows the ACCC to:

•        give a prohibited conduct notice to a corporation that the ACCC reasonably believes has engaged in prohibited conduct;

•        give a prohibited conduct recommendation to the Treasurer;

•        give a no Treasurer action notice; and

•        vary a prohibited conduct notice, prohibited conduct recommendation or a no Treasurer action notice.

6.6                   These notices are designed to enable the ACCC to notify a corporation if the ACCC reasonably believes, based on the information available, that the corporation has engaged in prohibited conduct. The ACCC must provide reasons for that belief.

6.7                   The prohibited conduct notice must also identify the further action or actions that the ACCC could recommend that the Treasurer take, and the reasons that the ACCC reasonably believes that the particular action or actions identified would be a proportionate way of preventing the corporation or another body corporate from engaging in the prohibited conduct in the future.

6.8                   The prohibited conduct notice procedure ensures that the corporation is afforded natural justice by giving the corporation an opportunity to respond and make representations in relation to the contents of the prohibited conduct notice.

6.9                   Following the prohibited conduct notice, the ACCC must give the Treasurer either:

•        a recommendation that the Treasurer:

-       make a contracting order; or

-       apply to the Federal Court for a divestiture order; or

•        a ‘no Treasurer action notice’, which means that the Treasurer will not make an order.

6.10               At every stage of these notices, the ACCC must consider whether a Treasurer’s response it recommends is a proportionate and targeted response to prevent the corporation from engaging in the kind of prohibited conduct in the future. This is a high threshold and is a safeguard to ensure that any response recommended by the ACCC to the Treasurer is measured and necessary.

Prohibited conduct notices

6.11               The ACCC may give a corporation a written prohibited conduct notice that includes recommendations for the kind of action that the Treasurer could take in response to prohibited conduct undertaken by the corporation. [Schedule 1, item 1, section 153C, definition of ‘prohibited conduct notice’, and subsection 153P(1)]

6.12               The ACCC may only make a prohibited conduct notice if the ACCC reasonably believes that the following conditions are satisfied:

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

•        that an order made in line with the recommendation set out in the prohibited conduct notice would be a proportionate means of preventing the corporation or any of its related body corporates from engaging in that kind of prohibited conduct in the future.

[Schedule 1, item 1, paragraphs 153P(1)(a) and (b)]

6.13               If the prohibited conduct notice includes a recommendation that the Treasurer apply to the Federal Court for a divestiture order, there are additional conditions that the ACCC must consider before giving the corporation the notice. The ACCC must reasonably believe that:

•        such a divestiture order will result, or is likely to result, in a benefit to the public; and

•        if the divestiture order will result, or is likely to result, in a detriment to the public, the benefit to the public would or is likely to outweigh the detriment to the public.

[Schedule 1, item 1, paragraph 153P(1)(c)]

6.14               The prohibited conduct notice must set out the following:

•        the relevant section of the CCA under which the notice is being issued;

•        the date the notice is issued;

•        the identity of the corporation;

•        the identity of any other connected body corporate in relation to the prohibited conduct;

•        the prohibited conduct that the ACCC reasonably believes has been engaged in, or that is being engaged in, and the reasons for the ACCC’s belief;

•        the recommendations that the ACCC is proposing to make in relation to the prohibited conduct; and

•        state that the corporation may make representations in response to the prohibited conduct notice, and specify the time that the corporation has to make the representations (this is ordinarily 45 days, unless the ACCC allows more time).

[Schedule 1, item 1, subsections 153P(2) and (3)]

6.15               Additionally, the notice must explain the reasons why the ACCC reasonably believes that the recommended Treasurer’s response is a proportionate means of preventing the prohibited conduct in the future. If the notice includes a recommendation that a divestiture order be made, the notice must also provide the reasons that the ACCC reasonably believes that such an order would be of net benefit to the public . [Schedule 1, item 1, paragraph 153P(2)(e)]

6.16               The notice must state that the corporation may make representations to the ACCC regarding the prohibited conduct in the prohibited conduct notice. This gives the corporation the opportunity to provide the ACCC with information about the prohibited conduct that the ACCC reasonably believes has been engaged in, including information that may result in the ACCC no longer having a reasonable belief that the corporation has engaged in the prohibited conduct. [Schedule 1, item 1, paragraph 153P(2)(f)]

6.17               The ACCC must provide a copy of the notice to each connected body corporate in relation to the prohibited conduct. If the ACCC fails to identify all the connected body corporates in relation to the prohibited conduct, this does not invalidate the notice. This ensures that the notice stands even if, for example, the ACCC fails to identify connected body corporates that have only a tangential relationship to the prohibited conduct. [Schedule 1, item 1, subsections 153P(4) and (5)]

6.18               A prohibited conduct notice given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153P(6)]

Variation and revocation of a prohibited conduct notice

6.19               The ACCC may vary or revoke a prohibited conduct notice that has been given to a corporation. [Schedule 1, item 1, subsection 153Q(1)]

6.20               The ACCC may consider that variation or revocation of a prohibited conduct notice is appropriate because:

•        the corporation has made representations, requested the notice be revoked or varied, or provided further information;

•        the ACCC becomes aware of new information which is relevant to the original notice or becomes aware of an error in the original notice; or

•        there is another reason that the ACCC believe that variation or revocation of the prohibited conduct notice is necessary.

6.21               As soon as practicable after it is made, the ACCC must give the written variation or revocation of the notice to the corporation, to any body corporate identified in the original prohibited conduct notice, and to any connected body corporate identified in a notice that has been varied,

6.22               The variation or revocation must contain the following items:

•        the date on which the notice has been varied or revoked; and

•        in the case of a variation, state that the corporation may make representations (within a specified time frame) to the ACCC responding to the variation.

[Schedule 1, item 1, subsections 153Q(2) and (3)]

6.23               The specified time period starts from the day the variation is issued and ends either:

•        45 days after the variation or revocation is issued; or

•        at a later date that the ACCC allows.

[Schedule 1, item 1, subsection 153Q(3)]

6.24               A variation or revocation of a prohibited conduct notice given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153Q(5)]

6.25               Subsection 33(3) of the Acts Interpretation Act 1901 has been excluded because there are requirements that the ACCC must comply with if it varies or revokes a prohibited conduct notice. The Acts Interpretation Act provision is excluded from operating to ensure that these are effective. [Schedule 1, item 1, subsection 153Q(6)]

Prohibited conduct recommendation and no Treasurer action notice

6.26               Following the issue of a prohibited conduct notice, the ACCC must give to the Treasurer:

•        a prohibited conduct recommendation; or

•        a no Treasurer action notice.

6.27               The recommendation or notice must be given to the Treasurer within 45 days of:

•        the end of the period stated in the prohibited conduct notice within which the corporation had to make representations to the ACCC in relation to the prohibited conduct notice; or

•        the end of the period stated in a variation of the prohibited conduct notice.

[Schedule 1, item 1, subsections 153R(1) to (3)]

6.28               The ACCC must also give the Treasurer a prohibited conduct recommendation if it has revoked a no Treasurer action notice on the basis that, in the circumstances, it is appropriate to issue a prohibited conduct recommendation. For more information on the revocation of a no Treasurer action notice see paragraphs 6.57 to 6.60 . [Schedule 1, item 1, subsections 153R(4) and (5)]

Prohibited conduct recommendation

6.29               The ACCC may give the Treasurer a written prohibited conduct recommendation if the ACCC reasonably believes that the following conditions are satisfied:

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

•        that an order made by the Treasurer or the Federal Court imposed on the corporation or a relevant body corporate in relation to the prohibited conduct would be a proportionate means of preventing the corporation or any of its related body corporates from engaging in that kind of prohibited conduct in the future.

[Schedule 1, item 1, section 153C, definition of ‘prohibited conduct recommendation’, and paragraphs 153S(1)(a) and (b)]

6.30               If the relevant conditions are met, the prohibited conduct recommendation may include more than one recommendation in relation to the prohibited conduct.

6.31               If the ACCC recommends that the Treasurer apply to the Federal Court for a divestiture order, there are additional beliefs that the ACCC must reasonably hold. These are that:

•        such a divestiture order will result, or is likely to result, in a benefit to the public; and

•        if a divestiture order will result, or is likely to result, in a detriment to the public, the benefit to the public would or is likely to outweigh the detriment to the public.

[Schedule 1, item 1, paragraph 153S(1)(c)]

6.32               The prohibited conduct recommendation must set out the following:

•        the relevant section of the CCA that the notice is being issued under;

•        the date it is issued;

•        the identities of all of the following:

-       the corporation;

-       each of the connected body corporates in relation to the prohibited conduct; and

•        the prohibited conduct that the ACCC reasonably believes that the corporation has engaged in or is engaging in, and the reasons why the ACCC believes that;

•        the recommendations for the kind of order the Treasurer or Federal Court should make in order to prevent the corporation or its related body corporates from engaging in that kind of prohibited conduct in the future, and explain the reasons justifying why the ACCC is recommending these Treasurer responses.

[Schedule 1, item 1, subsection 153S(2)]

6.33               The ACCC’s recommendation or recommendations can be different to the recommendation or recommendations in the prohibited conduct notice. This enables the ACCC to amend its recommendation or recommendations to the Treasurer to take into account representations made by the corporation in response to the prohibited conduct notice. [Schedule 1, item 1, subsection 153S(3)]

6.34               A notice is still valid if the ACCC does not identify each and every relevant body corporate in relation to the prohibited conduct in the notice. [Schedule 1, item 1, subsection 153S(4)]

6.35               The ACCC can identify new body corporates or remove body corporates compared to the body corporates the ACCC identified in the original prohibited conduct notice. This is to allow the ACCC to take into account representations made in response to the original notice. However, if the Treasurer subsequently makes an order or applies to the Federal Court for a divestiture order in relation to a connected body corporate then that connected body corporate must have been identified in the recommendation. [Schedule 1, item 1, subsection 153S(5), paragraphs 153W(a) and (b) and 153ZA(a) and (b)]

6.36               A prohibited conduct notice given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153S(6)]

Variation and revocation of a prohibited conduct recommendation

6.37               A prohibited conduct recommendation may be varied or revoked by the ACCC. A recommendation can only be varied or revoked by the ACCC within 45 days of:

•        the day the ACCC made the prohibited conduct recommendation; or

•        the day the ACCC made a variation to the prohibited conduct recommendation.

[Schedule 1, item 1, subsections 153T(1) and (2)]

6.38               A variation or revocation of the prohibited conduct recommendation cannot be made if the Treasurer has already applied to the Federal Court for a divestiture order or made a contracting order in relation to the recommendation. [Schedule 1, item 1, subsections 153T(3)]

6.39               A variation can only be made in two situations:

•        the variation is minor or insubstantial; or

•        all of the following conditions are met:

-       the corporate or any related body corporate gave the ACCC false or misleading information or failed to give relevant information; and

-       the variation is reasonably necessary to address the type of misinformation provided to the ACCC.

[Schedule 1, item 1, subsections 153T(4)]

6.40               In the first situation, this would allow the ACCC to make variations to correct minor or insubstantial errors made in the recommendation.

6.41               In the second situation, the ACCC could vary the recommendation to make changes that could disadvantage the corporation. However, these are justified because such changes must be as a result of the corporation giving false or misleading information in a material particular or omitting to give relevant information to the ACCC.

6.42               The ACCC must give the written variation or revocation of the notice to the Treasurer as soon as practicable and it must contain the day the notice has been varied or revoked. [Schedule 1, item 1, subsections 153T(5) and (6)]

6.43               A variation or revocation of a prohibited conduct recommendation given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153T(7)]

6.44               Subsection 33(3) of the Acts Interpretation Act 1901 has been excluded because the variation or revocation of a recommendation requires conditions that the ACCC must meet to do be able to do this. The Acts Interpretation Act provision is excluded from operating to ensure that these are effective. [Schedule 1, item 1, subsection 153T(8)]

No Treasurer action notice

6.45               The ACCC must give the Treasurer a written no Treasurer action notice if the ACCC considers that it is not appropriate to give the Treasurer a prohibited conduct recommendation in respect of the prohibited conduct notice. [Schedule 1, item 1, section 153C, definition of ‘no Treasurer action notice’, and subsection 153U(1)]

6.46               The ACCC may consider that it is not appropriate to give the Treasurer a prohibited conduct recommendation for a number of reasons. For example, following representations in response to the prohibited conduct notice the ACCC may no longer reasonably believe that the corporation has engaged in prohibited conduct, or the ACCC may no longer consider that the recommendation set out in the notice is a proportionate means of preventing the prohibited conduct in the future.

6.47               The no Treasurer action notice must set out the following:

•        the relevant section of the CCA under which the notice is being issued;

•        the date the notice is issued;

•        the reasons why the ACCC considers that it is not appropriate for a prohibited conduct recommendation to be given.

[Schedule 1, item 1, subsection 153U(2)]

6.48               45 days after giving the Treasurer the no Treasurer action notice, the ACCC must give the notice to the named corporation, unless the Treasurer and the ACCC agree that it is appropriate to provide the notice at an earlier time. [Schedule 1, item 1, subsection 153U(3)]

6.49               A no Treasurer action notice given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153U(4)]

Variation and revocation of no Treasurer action notice

6.50               A no Treasurer action notice may be varied or revoked by the ACCC. The ACCC may make a variation or revocation within 45 days of:

•        the day the ACCC made the no Treasurer action notice; or

•        the day the ACCC made a variation to the no Treasurer action notice.

[Schedule 1, item 1, subsections 153V(1) and (2)]

6.51               A variation or revocation of a no Treasurer action notice must state the day on which it is made and the ACCC must give it to the Treasurer as soon as practicable after it is made. [Schedule 1, item 1, subsections 153V(7) and (8)]

6.52               A variation or revocation of a no Treasurer action notice given by the ACCC is not a legislative instrument within the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1, subsection 153V(11)]

6.53               Subsection 33(3) of the Acts Interpretation Act 1901 has been excluded because the variation or revocation of a recommendation requires conditions that the ACCC must meet to do be able to do this. The Acts Interpretation Act provision is excluded from operating to ensure that these are effective. [Schedule 1, item 1, subsection 153V(12)]

Variation

6.54               A variation of a no Treasurer action notice may only be made if the ACCC is satisfied that the variation is minor or insubstantial. [Schedule 1, item 1, subsection 153V(3)]

6.55               If the no Treasurer action notice has already been given to the corporation when the ACCC makes their variation, then the ACCC must provide a copy of the variation to the corporation as soon as possible after making it. [Schedule 1, item 1, subsections 153V(9)]

6.56               If the no Treasurer action notice has not yet been given to the corporation when the ACCC makes the variation, then the variation must not be given to the corporation. Instead, the varied notice is subject to the same requirements as the original no Treasurer action notice (see paragraph 6.48). [Schedule 1, item 1, subsection 153V(10)]

Revocation

6.57               A no Treasurer action notice can only be revoked if the ACCC reasonably believes that:

•        it is appropriate to give the Treasurer a prohibited conduct recommendation, or to give the corporation a new prohibited conduct notice; and

•        the ACCC reasonably believes that either of the following conditions are met:

-       a revocation is reasonably necessary to address false or misleading information provided by the corporation or any related body corporate, or a failure by them to give the ACCC relevant information, in response to the prohibited conduct notice; or

-       the revocation is reasonably necessary to address new information or information that the ACCC did not have when the prohibited conduct notice was given.

[Schedule 1, item 1, subsection 153V(4) to (6)]

6.58               If the ACCC is satisfied that the tests for revocation are met, and revokes a no Treasurer action notice, then the ACCC must either give the Treasurer a prohibited conduct recommendation in relation to the prohibited conduct notice, or give the corporation a new prohibited conduct notice within 45 days of the revocation. [Schedule 1, item 1, subsections 153R(4) and (5)]

6.59               If the no Treasurer action notice has already been provided to the corporation when the ACCC makes its revocation, then the ACCC must provide the revocation to the corporation as soon as possible after making it. [Schedule 1, item 1, subsection 153V(9)]

6.60               However, if the no Treasurer action notice has not been given to the corporation before it is revoked, then a copy of the revocation must not be given to the corporation. A copy is not required to be provided to the corporation as the ACCC will issue a prohibited conduct notice to the corporation, or a prohibited conduct recommendation to the Treasurer. [Schedule 1, item 1, subsections 153V(10), 153R(4) and 153R(5)]

 



Chapter 7          

AER information gathering

Outline of chapter

7.1                   Schedule 2 amends the CCA to:

•        confer new compulsory information gathering powers on the AER;

•        allow the AER to share information with other agencies; and

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

Context of amendments

7.2                   Recommendation 30 of the ACCC’s Retail Electricity Pricing Inquiry is that, 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. Recommendation 32 is that, if an electricity retailer chooses to advertise using a headline discount claim, it must calculate the discount from the reference bill amount published by the AER. These recommendations are concerned with standing offers made to residential customers. Recommendations 49 and 50 deal with the extension of these recommendations to small businesses.

7.3                   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.

7.4                   Schedule 2 gives the AER the information-gathering powers it requires to perform these associated functions and makes other technical amendments to facilitate the implementation of the recommendations in this way.

Summary of new law

7.5                   Schedule 2 amends the CCA to:

•        confer new compulsory information gathering powers on the AER;

•        allow the AER to share information with other agencies;

•        clarify that regulations made for section 44AH(b) of the CCA may confer power on the AER to make disallowable or non-disallowable legislative instruments; and

•        allow the Electricity Retail Code of Conduct regulating electricity retailers to incorporate any non-disallowable legislative instruments made by the AER as in force or existing from time to time.

Detailed explanation of new law

New compulsory information gathering powers

7.6                   The AER has compulsory information gathering powers under the national energy laws (for example, section 28 of the National Electricity Law), but these powers cannot be used in relation to its Commonwealth functions. New section 44AAFA fills this gap.

7.7                   The power may be exercised if the AER has reason to believe that a person is capable of providing information, producing a document or giving evidence that the AER requires for the performance of its Commonwealth functions, including the functions conferred by including the functions conferred by Part 3 of the Competition and Consumer (Industry Code-Electricity Retail) Regulations 2019 . This is the same threshold that applies to the exercise of its compulsory information gathering powers under the national energy laws. [ Schedule 2, item 5, subsection 44AAFA(1)]

7.8                   Persons must be given written notice of the requirement to provide information, produce a document or appear before the AER, and when that must be done. Minimum time limits have not been included, so as to maintain consistency with the AER’s corresponding powers in the national energy laws. Nevertheless, it is expected that a person would be given the same amount of time to comply with a notice issued under section 44AAFA as they would be given under the corresponding provisions in the national laws. [ Schedule 2, item 5, subsections 44AAFA(2) and (3)]

7.9                   If a notice requires a person to appear before the AER to give evidence, the AER may require the evidence to be given on oath or affirmation. This is consistent with the ACCC’s compulsory information gathering powers (section 155(3) of the CCA) and proposed amendments to the corresponding provisions in the national energy laws. [ Schedule 2, item 5, subsection 44AAFA(4)]

7.10               Failure to comply with a notice is an offence punishable by imprisonment for 2 years or 100 penalty units, or both. This is the same as the penalty for contravening a notice issued by the ACCC (section 155(6A) of the CCA). Non-compliance is excused if the person is incapable of complying with the notice (for example, because a requested document does not exist) or if they cannot locate a document after reasonable searches. These excuses mirror those that apply in relation to an ACCC notice (section 155(5A), (5B) and (6) of the CCA). [ Schedule 2, item 5, section 44AAFB]

7.11               Other laws relating to giving information to Commonwealth entities will apply in relation to a person’s compliance with section 44AAFB. This includes provisions in the Criminal Code Act 1995 (Criminal Code) which provides a person may commit an offence if the person gives false or misleading information or produces false or misleading documents to the AER (see sections 137.1 and 137.2 of the Criminal Code).

7.12               Section 44AAFA does not affect the right of an individual to refuse to give information etc. on the ground that the information might tend to incriminate the individual. Nor does it affect the right of a person to refuse to give information on the ground that the information is subject to legal professional privilege or that disclosure is contrary to the public interest (for example, in relation to Cabinet documents). This is consistent with the exceptions set out in the national energy laws. However, a person is not excused from complying with a notice on the ground of any duty of confidence or on the ground that compliance might tend to expose the person to a civil penalty.

7.13               A person who wishes to rely on the defence contained in subsection 44AAFB(2) bears the evidential burden of proving the circumstance (per subsection 13.3(3) of the Criminal Code). That is, the person must produce evidence that suggests that the person is not capable of complying with the notice. A person who wishes to rely on the defence contained in subsection 44AAFB(3) bears the legal burden of proving that, after a reasonable search, the person is not aware of a requested document (subsection 13.4(b) of the Criminal Code). That is, the person must prove, on the balance of probabilities that, after a reasonable search, the person is not aware of a requested document (section 13.5 of the Criminal Code).

7.14               The reverse burden of proof is appropriate in the circumstances of this provision. The capacity of a person to comply with a notice, and information as to whether a person has undertaken a reasonable search for a requested document, are all matters that are peculiarly within the person's knowledge and would not generally be available to the prosecution. Affected persons (generally, electricity retailers) are expected to maintain thorough records of their business activities. Raising evidence of their capacity to comply with a notice, or proving on the balance of probabilities that they have undertaken a reasonable search for a document, should place no significant additional burden on them.

7.15               If the burden of proof were not reversed, the prosecutor would be required to undertake costly and difficult investigations. In many cases the prosecutor may have some difficulty accessing information about the person's capacity to comply with a notice or whether they have undertaken a reasonable search for a requested document. This could in turn undermine the effectiveness of the information gathering regime and the ability of the AER to perform its Commonwealth functions.

7.16               The AER may make copies of any document produced in compliance with a notice, and may retain the document for as long as necessary. In the meantime, the person who is otherwise entitled to the document is entitled to be supplied with a certified copy of it. This mirrors the arrangements that apply to documents produced to the ACCC under its compulsory information gathering powers (section 156 of the CCA). [ Schedule 2, item 5, section 44AAFC]

Use and disclosure of information

7.17               Information collected under the AER’s new compulsory information gathering powers may only be used or disclosed in accordance with section 44AAF of the CCA. That section authorises disclosures required or permitted by an Australian law, disclosures to specified or prescribed bodies, and use or disclosure in the course of the performance of the AER’s functions and powers or in prescribed circumstances.

7.18               New section 44AAF(3A) authorises (but does not require) the AER to disclose information to another agency (Departments, bodies and office holders established or appointed for a public purpose by the Governor-General, a Minister or under Commonwealth law) if the AER is satisfied that the information will enable or assist the agency to perform or exercise its functions or powers. The AER may impose conditions that must be complied with in relation to that information. [ Schedule 2, item 3, subsections 44AAF(3A), (3B) and (5)]

7.19               The amendment is modelled on ASIC’s disclosure regime (section 127(4)(a) of the Australian Securities and Investments Commission Act 2001 ). It is not targeted at the disclosure of personal information, but is instead intended to authorise disclosure of information about energy businesses to ASIC (to the extent that the information would assist ASIC to regulate those businesses), and retail tariff and price information to the Australian Bureau of Statistics (to the extent that the information would assist the Bureau in the performance of its functions), CSIRO (to the extent that the information is relevant to the National Energy Analytics Research Program) and other agencies with responsibility for energy policy, as appropriate. The breadth of the bodies to whom information may be disclosed is balanced by the AER’s discretion to disclose only in circumstances where it is satisfied that the agency has a need for it, and its power to make the disclosure conditional (which could include a condition that the information is not further disclosed, or is only disclosed in an aggregated way).

Power to make legislative instruments

7.20               Commonwealth functions can be conferred on the AER under regulations made for section 44AH(b) of the CCA. New section 44AH(2) clarifies that these functions can include a function of making legislative instruments, including for the purposes of an industry code. [ Schedule 2, item 1 and 2, subsections 44AH(1) and (2)]

7.21               The default position is that legislative instruments made by the AER are non-disallowable. However, the regulation conferring the instrument making power can provide that the instrument is disallowable. [ Schedule 2, item 2, subsections 44AH(3) and (4)]

7.22               This is consistent with the position that would apply in any event under section 44(1) of the Legislation Act 2003 (at least to the extent that the AER is an intergovernmental body within the meaning of that section, on account of it consisting of Commonwealth and State/Territory members and being established in accordance with an intergovernmental agreement (the Australian Energy Market Agreement) for the purposes of furthering an intergovernmental scheme (the national energy laws)). In particular, section 44(1) provides that section 42 of the Legislation Act 2003 does not apply in relation to a legislative instrument, or a provision of a legislative instrument, if the enabling legislation for the instrument (in this case, the regulation conferring the instrument-making power):

(a) facilitates the establishment or operation of an intergovernmental body or scheme involving the Commonwealth and one or more States; and

(b) authorises the instrument to be made by the body or for the purposes of the body or scheme, unless the instrument is a regulation, or the enabling legislation or some other Act has the effect that the instrument is disallowable .

7.23               The Electricity Retail Code of Conduct set out in Part 2 of the Competition and Consumer (Industry Code - Electricity Retail) Regulations 2019 provides, amongst other things, that a retailer’s standing offer prices cannot exceed the amount determined by the AER. Part 3 of the Regulations confers on the AER the function of determining these amounts. Section 16(5) of the Regulations provides that these determinations are disallowable. Following the commencement of section 44AH(3) (and section 51AE(3), discussed below), section 16(5) of the Regulations will be repealed, with the result that the AER determinations will be non-disallowable. The determinations will remain freely and easily accessible to the public on the Federal Register of Legislation.

7.24               The AER must have regard to a range of factors when making these determinations, including the principle that an electricity retailer should be able to make a reasonable profit. This type of function is most suited to an independent economic regulator, and it is therefore appropriate that the determinations are non-disallowable

Incorporation of AER instruments in retail electricity industry code

7.25               Section 14(2) of the Legislation Act 2003 prevents the Electricity Retail Code of Conduct from incorporating a non-disallowable legislative instrument made by the AER as in force or existing from time to time. New section 51AE(3) overrides section 14(2) in relation to AER determinations made under the Competition and Consumer (Industry Code - Electricity Retail) Regulations 2019 . As a consequence, the Electricity Retail Code of Conduct will be able to incorporate non-disallowable AER determinations as in force from time to time. [ Schedule 2, item 6, subsections 51AE(3) and (4)]

Consequential amendments

7.26               Consequential amendments are made to section 79A(1) of the CCA, to facilitate the enforcement and recovery of any fine imposed for an offence against section 44AAFA, and section 163(5), to facilitate the prosecution of such offences. [ Schedule 2, items 7 to 9, subparagraph 79A(1)(a)(i), paragraph 79A(1)(d) and subsection 163(5)]

 



Chapter 8          

Regulation impact statement

Background and context

8.1                   On 27 March 2017, the then Treasurer directed the Australian Competition and Consumer Commission (ACCC) to hold an inquiry into the supply of retail electricity and the competitiveness of retail electricity prices in the National Electricity Market (NEM) (the Retail Electricity Pricing Inquiry , or REPI). This inquiry was in response to electricity affordability becoming a significant issue for households and small businesses.

8.2                   The ACCC delivered the REPI Final Report to Government on 29 June 2018. [1] The ACCC found that the average residential customer bill has increased by more than 35 per cent in real terms over the past 10 years, with average residential electricity prices (expressed as cents per kilowatt hour) increasing by 56 per cent in real terms over the same period. The ACCC also found that small businesses had experienced similar increases in the past decade.

8.3                   The report found that there are a number of causes of higher prices, and made 56 recommendations spanning the entire electricity supply chain, focussing on the objectives of boosting competition, lowering electricity costs, and improving experiences for consumers and businesses. The ACCC reported that, when taken alongside falls in wholesale prices and flattening or declining network charges, the recommendations could achieve substantial savings for retail consumers.

Background on the electricity supply chain

8.4                   The following concepts are relevant throughout this document:

•        The electricity wholesale market (spot market) : In the electricity wholesale market, electricity generators make capacity available for purchase by retailers and, in some cases, large end users.

•        Electricity networks : Electricity networks consist of regulated infrastructure which enables the transmission and distribution of electricity from generators to consumers.

•        The electricity contract market : The electricity contract market consists of financial contracts which are designed to assist generators and retailers in managing the risk of price volatility on the electricity spot market by effectively allowing them to fix electricity prices for a set period (for example, by providing for compensation to be paid where the wholesale spot price is higher than the price set in the contract).

•        The electricity retail market : In the electricity retail market, electricity retailers sell electricity to residential and small business consumers. Retailers purchase electricity directly from the wholesale market, and enter into electricity contracts to manage their exposure to wholesale market price volatility. Retail consumers pay prices set by their retailer under a range of ‘market offers’ (competitively priced offers which often include discounts) or ‘standing offers’ (for consumers who do not actively choose a market offer). Increases and decreases in wholesale spot prices, network charges, contracting prices and other supply chain costs can ultimately flow through to retail consumers.

•        Gentailer : A colloquial term for a vertically-integrated entity which operates in both the wholesale market (as a generator) and in the retail market (as a retailer).

The problem

8.5                  

The problem is that electricity market participants can engage in conduct which may be harmful to consumers by detracting from the efficient and competitive operation of the electricity market, but which is not prohibited by the existing prohibitions in the Competition and Consumer Act 2010 . The problems, as identified by the ACCC in its REPI Final Report, broadly relate to the possibility of taking advantage of confused and disengaged consumers, contract market illiquidity, and conduct which undermines the effective operation of the wholesale market.

8.6                   On 20 August 2018 the Treasurer tasked the ACCC with an ongoing Electricity Price Monitoring Inquiry (EPM Inquiry), to run from 2018 to 2025. [2] The EPM Inquiry is intended to ensure consumers receive the benefit of any reduced supply chain costs, and ensure that electricity markets are operating competitively and efficiently, to the benefit of consumers. The terms of reference specifically require the ACCC to monitor and report on three issues the ACCC identified through its REPI in relation to electricity retail, contract and wholesale markets.

Retail electricity markets

8.7                   The ACCC found that retail electricity pricing structures are confusing to consumers, and discounting practices make it difficult for consumers to compare offers across the market. The ACCC found that retailers’ behaviour has led to poor consumer outcomes, in particular:

Electricity retailers’ discounting practices are a deliberate tactic to give the impression that an offer is significantly cheaper than other offers in the market when this is often not the case. This behaviour is confusing, at times misleading, and leads to poor consumer outcomes. [3]

8.8                   As part of this practice, consumers who shop around are rewarded with greater discounts (which in some cases operate as a form of late payment penalty for consumers unable to satisfy the attached conditions) while less active consumers are left on excessively-priced standing offers.

8.9                   On electricity retail price competition, the ACCC found:

Retailers’ confusing discounting practices indicate a lack of effective competition…Discount offers are presently complex and difficult to compare, which enables retailers to compete less aggressively on price. [4]

8.10               In the absence of effective competition, moderations in wholesale prices create an opportunity for retailers to profit at the expense of consumers by retaining supply chain cost savings rather than passing those savings on to consumers.

8.11               A hypothetical example to illustrate the problem is where:

•        a retailer’s costs fall substantially due to a significant and sustained decrease in wholesale costs (i.e. the costs of acquiring electricity from the spot market as well as longer-term costs such as contracting to manage exposure to spot price variation); and

•        the retailer fails to reduce their prices to reflect the reduced supply chain costs, leaving its consumers on higher-priced offers.

8.12               Ordinarily, in a market characterised by effective competitive constraint and price competition, a retailer would be unable to engage in such conduct. This is because one retailer cannot be certain that its competitors will not reduce their prices, and thereby win customers from the first retailer. However, in electricity retail markets, it is possible for retailers to take advantage of consumers’ confusion and disengagement and their resulting difficulty in identifying and switching to better deals.

8.13               Electricity retail markets have a number of somewhat unique characteristics, which result in consumers’ lower levels of responsiveness to price shifts relative to that observed in other markets. These characteristics can be illustrated by comparison to the petrol market:

•        Regularity of consumer engagement:

-       Consumers generally select a retail electricity offer no more than once a year (at best) and in some cases may only select an offer when they move house.

-       Consumers purchase petrol on a much more regular basis and can more readily identify shifts in prices.

•        Triggers for consumer engagement:

-       Electricity consumers lack regular ‘triggers’ to select another offer, as retail electricity contracts are often for 12 months and consumers’ electricity supply continues after the contract expires and the benefits under that contract are lost.

-       Consumers often purchase petrol on a weekly basis and are forced to purchase more petrol to continue using their vehicles.

•        Information asymmetry and comparability:

-       Electricity prices can be difficult to understand and compare, as they consist of both a supply charge and a tariff and may include other variables (such as peak and off-peak tariffs).

-       Petrol prices are prominently displayed outside petrol stations and are expressed in a simple, readily comparable figure of dollars and cents per litre.

•        Industry transition:

-       The electricity sector is in a period of significant structural change, with factors such as the greater prominence of intermittent generation technology, the progressive ageing and retirement of the existing generation fleet, improvements in technology (such as smart meters) and greater access to information (such as through the consumer data right).  

-       The petrol sector is relatively static by comparison.

8.14               As part of the EPM Inquiry, the ACCC is undertaking ongoing monitoring of electricity prices faced by customers, including both the level and spread of price offers, analysing how wholesale prices are influencing retail prices and whether any wholesale cost savings are being passed through to retail customers.

Electricity contract markets

8.15               Electricity financial contracts are important for effective risk management, as they allow a retailer to set a fixed rate over a specified period, and thereby hedge against the risk of spot market volatility. This, in turn, is critical for confidently operating in the retail market. The ACCC found that a lack of electricity contract liquidity, in part related to vertical integration between electricity generators and retailers, has the potential to become a barrier to entry and expansion for some electricity retailers. The ACCC found that:

In certain regions of the NEM, particularly South Australia, the level of liquidity and the advantages enjoyed by vertically integrated retailers make it difficult for new entrants and smaller retailers to compete effectively in the retail market. [5]

Without sufficient competitive pressure in wholesale and retail markets, these vertically integrated players may have the ability and incentive to withhold contracts from rival retailers, or to discriminate against them regarding price. [6]

8.16               A lack of liquidity in electricity contract markets limits the ability for new electricity retailers to enter the market and compete to win customers with better deals. A hypothetical example to illustrate how contracting behaviour (or rather, a lack thereof) can be used for anti-competitive purposes is where:

•        Gentailer A, an incumbent generator and retailer, typically offers contracts directly with Retailers A, B and C, standalone retailers with no generation assets of their own;

•        Retailer B becomes a significant competitive threat to Gentailer A at the retail level;

•        Gentailer A then refuses to contract with Retailer B, for the purpose of ensuring Retailer B is unable to manage its risk and becomes unviable, removing the competitive threat from the retail market and thereby substantially lessening competition.

8.17               As part of the EPM Inquiry, the ACCC is undertaking ongoing monitoring of contract market liquidity, including assessing whether vertically integrated electricity suppliers are restricting competition and new entry.

Wholesale electricity markets

8.18               The ACCC found that there is a general lack of competitive constraint in wholesale electricity markets. Where behaviour interferes with competitive processes in wholesale electricity markets, increased prices flow through the supply chain to consumers. While the ACCC considered that clear instances of manipulation are not a major feature in the market today, [7] it also reported that:

This lack of competitive pressure is of concern to the ACCC, particularly given the critical need for a sufficient level of competition in [the wholesale] market to drive affordable electricity prices. [8]

8.19               The ACCC went on to recommend a rule against market manipulation (behaviour which has the effect of manipulating the proper functioning of the wholesale market), together with powers to prevent businesses from exploiting cross-market positions. [9]

8.20               While there is a broad scope of conduct which may have the effect of manipulating the proper functioning of the electricity wholesale market, a hypothetical example of such behaviour is where:

•        a generator schedules discretionary maintenance on a large power plant to occur during a peak period, to cause a spike in wholesale prices and thereby increase the revenue the generator makes through its other plants.   

8.21               As part of the EPM Inquiry, the ACCC is undertaking ongoing monitoring of wholesale market prices, including the contributing factors to these such as input costs, bidding behaviour and any other relevant factors.

Interaction with existing legislation

8.22               There are existing prohibitions and remedies in the Competition and Consumer Act 2010 (CCA), designed to ensure competitive markets and protect consumers, such as the misuse of market power provision (section 46), a prohibition on exclusive dealing (section 47) and a prohibition on misleading or deceptive conduct (section 18 of the Australian Consumer Law).

8.23               However, the issues described above are somewhat unique to the electricity sector and may fall outside the scope of the existing broad prohibitions. For example, section 46 does not prevent a retailer failing to reasonably pass through supply chain cost savings, as this does not have the purpose, effect or likely effect of substantially lessening competition. Other existing prohibitions are similarly not adapted to the unique situation in electricity markets.

8.24               Further, there are currently no specific remedies tailored to the electricity sector that could be applied if the ACCC’s ongoing monitoring identifies issues in these areas. There is a risk that, unless action is taken, the electricity market might not operate as competitively and efficiently as it could to deliver the best price outcomes for consumers.

Interaction with other Government policies

8.25               The Government has introduced a number of other policies designed to address electricity affordability, secure good outcomes for consumers, and promote well-functioning electricity markets. For example:

•        the default market offer, which was recommended by the ACCC and commenced on 1 July 2019, is intended to reduce the highest retail electricity prices, limiting retailers’ ability to exploit their most disengaged consumers;

•        the reference bill, which was recommended by the ACCC and commenced on 1 July 2019, is intended to establish a common benchmark against which all retail offers and discounts can be compared, providing consumers with greater transparency around retail offers and improving their ability to identify the best deal; and

•        the Consumer Data Right is intended to give consumers greater control over their own data and assist consumers to identify and negotiate better deals.

8.26               These policies are designed to improve transparency in the retail market and better inform consumers, so that they may select the best deal from amongst retail offers. However, on their own, they do not guarantee that those retail offers reflect shifts in retailers’ underlying costs.

Case for government action / Objective of reform

8.27               Government action is necessary because, as discussed above, the current prohibitions and remedies available in the Competition and Consumer Act 2010 are not well adapted to the somewhat unique issues that could arise in electricity retail, contract and wholesale markets.

8.28               In relation to retail electricity markets , there is a risk that electricity retailers retain the savings from any reduced-supply chain costs as profits, rather than pass those on to consumers. In other markets where there is effective retail competition, retailers place competitive pressure on each other to pass on cost savings to consumers, because consumers are engaged and dissatisfied consumers will likely move to a competitor which is offering a lower price. In those markets, there is no need to prohibit a failure to reasonably pass on cost savings. However, in electricity retail markets, retailers may be able to take advantage of consumers’ confusion and disengagement. In the absence of government action, retailers may not have a strong enough incentive to offer consumers better deals in response to supply chain cost savings.

8.29               In relation to electricity contract markets , behaviour which limits contract liquidity can act as a barrier to entry in retail electricity markets. This is because, without sufficient access to electricity financial contracts (such as caps, swaps or power purchase agreements), standalone retailers without generation assets are over-exposed to wholesale spot market volatility. This barrier to entry can undermine effective competition at the retail level, as new retailers may face difficulty entering, or not be on a level playing field with incumbents. Ultimately, ineffective competition at the retail level is detrimental to consumers.

8.30               In relation to wholesale electricity markets , generators may engage in certain bidding and non-bidding conduct which can undermine effective competition in the wholesale market and distort or manipulate prices, which increases supply chain costs at the expense of consumers.  

8.31               This measure therefore has a twofold objective:

•        Firstly, to ensure that electricity retail, contract and wholesale markets are operating competitively, efficiently and to the benefit of consumers; and

•        Secondly, to ensure that consumers realise the benefits of reduced supply chain costs, resulting from more effective competition, policy reform and other factors.

Policy options

8.32               Three options were considered to ensure well-functioning and competitive electricity retail, contract and wholesale markets and to ensure electricity consumers see the benefits of reduced supply chain costs.

Option 1: Status quo, implementing REPI recommendations

8.33               The first option is no action (i.e. maintain the status quo). This option, like options 2 and 3, would involve the implementation of some or all of the REPI recommendations. REPI recommendations which have been agreed and, in some cases, implemented by the Government include:

•        implementing a cap on the market share of generators, which would prevent further acquisition beyond the cap but permit investment in new capacity (recommendation 1);

•        a default market offer, regulated by the Australian Energy Regulator (AER), to replace standing offers (recommendation 30);

•        using the default market offer as a reference point for all advertised discounts (recommendation 32);

•        placing limits on the size of conditional discounts (recommendation 33); and

•        establishing a mandatory code of conduct for energy comparator websites (recommendation 34).

8.34               However, under this option there would be no ongoing monitoring of whether electricity retail, contract and wholesale markets are operating competitively and efficiently and no ability to quickly respond to any issues identified. Therefore, this option would not ensure that consumers receive the benefits of any reductions in electricity supply chain costs.

Option 2: Electricity Price Monitoring Inquiry without remedies and sanctions

8.35               The second option is that the ACCC undertake an EPM Inquiry without remedies or sanctions to address any misconduct identified by the ACCC. This is in addition to the implementation of some or all of the REPI recommendations (option 1).

8.36               Under this option, the ACCC would undertake ongoing monitoring of electricity retail, contract and wholesale markets, and would provide regular reports on its findings.

8.37               Where the ACCC identifies unacceptable behaviour, such as a failure to pass through substantial supply chain savings to consumers or behaviour designed to hinder effective competition, the ACCC could publicly report on this conduct and make recommendations for government consideration.

8.38               However, under this option there would be no mechanism available to immediately take action against unacceptable conduct. This means that identified harm to consumers or to the competitive process may be able to persist (and potentially worsen) while the Government considers and implements any recommendations made by the ACCC.

Option 3: Electricity price monitoring with remedies and sanctions

8.39               The third option is to make available a graduated range of remedies and sanctions to address any misconduct identified by the ACCC. This is in addition to the implementation of some or all of the REPI recommendations (option 1) and the ACCC undertaking an ongoing EPM Inquiry (option 2).

8.40               Unlike option 2, this option includes a legislative framework prescribing prohibited conduct, setting out the applicable remedies and sanctions, and providing processes for applying the remedies and sanctions. The legislation would sunset at the end of 2025, unless a review determines that it should continue to operate beyond 2025.

8.41               Under this option, at any point during the ongoing electricity price monitoring inquiry, the ACCC or the Government would be able to take action when it identifies a corporation engaging in prohibited conduct.

Prohibited conduct:

8.42               Under this option, the legislation will prescribe prohibited conduct in a three-limb provision corresponding to the three limbs of the ACCC’s ongoing EPM Inquiry. The prohibition is intended to target behaviour by electricity corporations which is detrimental to competition and/or to consumers.

•        The retail pricing limb is targeted toward conduct by retailers that take unfair advantage of consumers’ confusion around retail electricity offers and their difficulty in identifying and switching to better deals, by failing to reasonably pass through supply chain cost savings to consumers on market offers. This limb would attract the ACCC-imposed remedies (public warning notice, infringement notice) or an ACCC application to the Court for civil penalties. Contracting orders (Treasurer-ordered) and divestiture orders (Court-ordered) would not be available for a breach of this limb.

•        The contract liquidity limb is targeted toward conduct whereby a generator refuses to offer electricity financial contracts to a rival at the retail level for anti-competitive purposes. This limb would attract the ACCC-imposed remedies, Court-ordered civil penalties, or a Treasurer-issued contracting order. Court-ordered divestiture would not be available for this limb.

•        The wholesale bids and conduct limb is targeted toward bidding and non-bidding conduct by generators, which is anti-competitive or manipulative and can lead to an increase in prices which flows through to consumers. This limb would attract the full suite of remedies detailed below. Contracting orders and divestiture orders would only be available for a breach of the aggravated case of this limb, not for the basic case.

Remedies and sanctions:

8.43               Where the ACCC identifies prohibited conduct, the following remedies and sanctions would be available, where appropriate with reference to applicable legislated criteria (which are detailed below).

1) A public warning notice issued by the ACCC.

8.44               Upon identifying prohibited conduct, the ACCC will be able to issue a public warning notice.

2) An infringement notice issued by the ACCC.

8.45               Upon identifying prohibited conduct, the ACCC will be able to issue an immediate infringement notice which includes a penalty amount. Infringement notices are used by the ACCC as an enforcement tool in a number of other contexts.

3) Court-ordered civil penalties on application to the Court by the ACCC.

8.46               Upon identifying prohibited conduct, the ACCC will be able to apply to the Court for a civil penalty order. Civil penalties would be in line with those available for other breaches of the competition law, and significantly higher than the penalties available under an infringement notice.

4) Treasurer-issued price cap orders.

8.47               An additional remedy which was previously considered was to impose a price cap on a retailer’s market offers for a specified period. The Government has since implemented a default market offer, which from 1 July 2019 caps the price of standing offers in non-price regulated jurisdictions (with the exception of Victoria, noting the Victorian Government has implemented a similar regulation). A price cap remedy has not been implemented in this legislation.

5) Treasurer-issued contracting orders.

8.48               Upon identifying prohibited conduct in relation to either the contract l limb or the wholesale bids and conduct limb, the ACCC will be able to initiate a notice and response process with the corporation. Following this process, the ACCC could make a recommendation to the Treasurer that would allow the Treasurer to make an order that the corporation offer electricity financial contracts to unrelated parties.

8.49               The order will need to specify details such as:

•        the amount of generation capacity the offers must relate to;

•        a requirement that offers be made on commercial terms (to prevent corporations seeking to circumvent the order by making offers on terms that are unlikely to be accepted);

•        the period(s) over which offers must be made; and

•        any other details necessary to give effect to the order.

8.50               This remedy is essentially a form of structural separation, as it aims to ensure vertically integrated entities are making contracts available to third parties rather than solely (or primarily) using them internally.

6) Court-ordered divestiture on an application by the Treasurer.

8.51               Upon identifying an aggravated case of misconduct in the wholesale market, the ACCC will be able to initiate a notice and response process with the corporation. Following this process, the ACCC could make a recommendation to the Treasurer that would allow the Treasurer to apply to the Court for an order that a corporation divest some or all of its assets. In determining whether to accept the ACCC’s recommendation and make an application to the Court, the Treasurer would need to consider not only that the remedy is proportionate and targeted, but also that the public benefit of the order would outweigh any public detriment.

8.52               In its REPI Final Report, the ACCC considered divestiture as a mechanism for reducing market concentration (rather than in response to particular prohibited conduct) and did not support it, arguing that its other recommendations would sufficiently address the conduct it identified.

8.53               However, the Government considers that divestiture is needed as an additional remedy, to deter corporations from engaging in particularly egregious prohibited conduct. It is intended that divestiture orders would only be sought as a last resort, and subject to a court finding a corporation has breached the aggravated wholesale conduct prohibition. The divestiture order power is a significant deterrent, and it may never become necessary to seek such an order.

Contracting orders and divestiture orders - legislative criteria

8.54               Treasurer-issued contracting orders and Court-ordered divestiture orders are subject to a requirement that the chosen remedy must be a proportional means of preventing the corporation from engaging in that conduct in future. This is designed to ensure that the remedies cannot be applied where this would be disproportionate and a lesser remedy would be as effective in preventing the conduct from re-occurring.

8.55               In relation to divestiture orders, there is an additional legislative test to be met by the ACCC (in making a recommendation to the Treasurer) and the Treasurer (in determining whether to make an application to the Court), whereby the actual or likely public benefit of a divestiture must outweigh any actual or likely detriment.

8.56               Public benefit is a broad concept, encompassing benefits to the market (e.g. increased competition, for example where an asset can be sold to assist a new market entrant), and to consumers (e.g. lower prices which may flow from increased competition), among other potential benefits.

8.57               Similarly, public detriment is also a broad concept, encompassing detriment to the market (e.g. any investor uncertainty) as well as any detriment to consumers (e.g. where a divestiture would be detrimental to system reliability, or might lead to increased prices in the longer term) among other potential detriments.

8.58               The public benefit and detriment of a particular divestiture would need to be weighed on a case-by-case basis with reference to the specific circumstances. These concepts are further explored in section 4.

8.59               In determining whether to make a divestiture order, the Court is also subject to the test of proportionality.

Notice and response process for Treasurer-issued remedies

8.60               For more serious conduct, where the ACCC considers a contracting or divestiture order is warranted, this option provides for the ACCC to engage with the corporation to resolve the issue before making a recommendation to the Treasurer.

8.61               This would involve the ACCC issuing a notice to the corporation, stating that the ACCC considers the corporation has engaged in prohibited conduct, and giving the corporation an opportunity to provide a response explaining its conduct or detailing how it will remedy its conduct, as well as an opportunity for the corporation to comment on the recommendation under consideration.

8.62               The ACCC will then have a period to consider the corporation’s response, and will give a notice to the Treasurer either recommending the Treasurer take action (either that the Treasurer make a contracting order, or apply to the Court for a divestiture order), or stating that no action is recommended.

8.63               The Treasurer will then have a period to consider the ACCC’s notice. Where the ACCC recommends that no action be taken, the Treasurer will take no action. Where the ACCC recommends a remedy, the Treasurer will be required to consider whether the relevant tests are met (including proportionality, and an additional public benefit test for divestiture) before determining whether or not to accept the ACCC’s recommendation.  

8.64               If the ACCC recommends that the Treasurer seek a Court-ordered divestiture order, and the Treasurer considers all relevant tests are met, the Treasurer will then apply to the Federal Court seeking tha t a divestiture order be made.

Cost benefit analysis of each option / Impact analysis

8.65               This section discusses the expected impact of each policy option. Each of the three policy options is likely to have some impact on electricity corporations (retailers and generators, some of which are vertically integrated as ‘gentailers’) and electricity consumers.

Option 1: Maintain the Status Quo, implementing REPI recommendations

8.66               Option 1 is the implementation of some or all of the REPI recommendations with no additional action. REPI recommendations which have been accepted by the Government are detailed in section 3.

8.67               The REPI made a number of recommendations related to electricity retail, contract and wholesale markets, which are expected to be beneficial in terms of promoting more effective competition and reducing supply chain costs. The ACCC reported that electricity consumers, in particular residential consumers and small businesses, could see substantial savings as a result of the implementation of its recommendations.

8.68               Each of options 1, 2 and 3 should carry these benefits to electricity consumers in the form of lower prices, and to electricity markets in the form of increased competition. In their submissions to the consultation paper, some stakeholders suggested the Government should focus on progressing the ACCC recommendations as these would do more to promote competition and address the causes of high prices.

8.69               However, the ACCC’s estimated savings and other benefits will only eventuate if electricity corporations’ behaviour supports effective competition, and if retailers choose to pass through those savings. Under this option, there is no ongoing monitoring of conduct and no guarantee of retailers passing through any supply chain cost savings, resulting from increased competition, policy reforms and other factors, to consumers.

8.70               This option would impose no additional regulatory costs on electricity corporations, other than those being considered and dealt with separately as part of the implementation of individual REPI recommendations.

Option 2: Electricity price monitoring without remedies and sanctions

8.71               Option 2 is the implementation of some or all of the REPI recommendations (option 1), with an ongoing EPM Inquiry, but without remedies or sanctions available to address any misconduct identified by the ACCC.

8.72               The option has the added benefit of shining a light on the behaviour of participants in electricity retail, contract and wholesale markets. Electricity corporations would know that their behaviour is under constant monitoring between 2018 and 2025, with the prospect of the ACCC publicly reporting on any behaviour which is not in the interests of effective competition or which contributes to poor outcomes for electricity consumers. In and of itself, this monitoring and reporting may prompt a positive behavioural change by electricity corporations.

8.73               Similarly, where the ACCC publishes reports identifying unacceptable behaviour by particular corporations or data about the relative prices offered by retailers, this could theoretically prompt consumers to seek and switch to a better deal. Over time, this could provide sufficient competitive pressure for electricity companies to behave in a way that is pro-competitive and in the interests of their consumers. However, as discussed in section 1, the electricity market faces a somewhat unique problem in that there is a sub-set of consumers who are disengaged from the market and are not responsive to changes in price. It is likely that these consumers would continue to stay on an unfavourable offer, even if the ACCC makes a publication that the particular offer is excessively high relative to other offers in the market. This option therefore has the potential to exacerbate the problem of ‘winners and losers’ amongst retail electricity customers.

8.74               Further, where the ACCC identifies unacceptable behaviour, it would have no immediate enforcement tools available to address the conduct beyond ‘naming and shaming’ in its reports and making recommendations for Government consideration. Such recommendations may take months, or even years, to implement depending on their nature. As electricity companies would be aware of the ACCC’s lack of enforcement tools, they would have little incentive to take immediate steps to remedy their conduct, and are likely to wait for the Government to action recommendations made in the ACCC’s six-monthly reports. This may mean that behaviour which hinders effective competition, or is detrimental to electricity consumers, could persist or even worsen over time. The lack of enforcement tools is therefore considered a significant hindrance to the effectiveness of the EPM Inquiry.

Option 2: Regulatory burden costings:

8.75               This option is expected to carry regulatory compliance costs, insofar as the ACCC issues information-gathering notices under section 95ZK of the Competition and Consumer Act 2010 to electricity corporations. It is expected that compliance with such notices will cost businesses approximately $420,000 per year over ten years. This figure is based on the following assumptions, based on the REPI:

•        The ACCC is assumed to issue approximately 80 information-gathering notices per year, primarily to electricity retail and electricity generation businesses. Over the course of the REPI, the ACCC issued over 110 notices over 15 months. [10]  

•        It is assumed that it will take an average of approximately 110 hours to comply with each notice, noting that it may take more or less time to comply depending on the precise requirements of the notice.

8.76               The REPI was a very recent and comprehensive examination of the electricity supply chain, and it is expected that the EPM Inquiry may not need to cover precisely the same ground. These estimated regulatory costs therefore represent an upper estimate.

Table 8.1 Regulatory burden estimate table - Option 2

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

$0.42m

$0

$0

$0.42m

Option 3: Electricity price monitoring with remedies and sanctions

8.77               Option 3 is the implementation of some or all of the REPI recommendations (option 1), with an ongoing EPM Inquiry (option 2), with remedies or sanctions available to address any misconduct identified by the ACCC.

8.78               In addition to the benefits detailed under options 1 and 2, this option has the added benefit of providing the ACCC and the Government with a graduated range of enforcement tools and a procedure for taking more immediate action against conduct which breaches a new set of prohibitions tailored to the electricity retail, contract and wholesale markets.

8.79               Two elements of the legislative framework, the prohibitions and the remedies, are expected to carry significant non-regulatory costs and benefits. These costs and benefits are expected to occur across electricity markets, with few geographical differences, except as detailed below.

The prohibitions

8.80               While there is a degree of overlap with existing prohibitions, the prohibitions considered are new and specific to the regulatory framework for the electricity sector.

8.81               In their submissions to the consultation paper, many stakeholders noted the importance of ensuring the prohibitions recognise the somewhat unique design and operation of electricity markets. They noted that improperly designed prohibitions could have unintended consequences, such as interfering with retailers’ risk management strategies and risking their viability, or exposing consumers to price volatility which retailers would otherwise seek to smooth out.

8.82               Noting these stakeholder concerns, the prohibitions have been carefully designed to strike an appropriate balance between capturing unacceptable conduct and not over-capturing legitimate conduct. The explanatory memorandum provides detailed guidance on the intended scope of the prohibitions.

8.83               The retail price limb has been designed to require that sustained and substantial supply chain cost savings are reasonably passed through to consumers on market offers. Retailers’ submissions questioned this limb, and suggested that this prohibition would amount to price regulation and cause risks to their viability. However, this limb does not require retailers to immediately pass through savings in response to small or short-term price fluctuations, as this would expose consumers to price volatility. Retailers would only be required to make adjustments in response to substantial changes in underlying electricity costs which occur over a sustained period.

8.84               Similarly, it does not presume a ‘one size fits all’ approach, noting that different retailers will be in different positions and therefore it will not necessarily be reasonable to require all retailers to reduce their prices by the same amount in response to a particular change in conditions. For example, it would be open to a retailer to argue that it is not reasonable to pass through wholesale cost savings if their overall costs of supply had remained the same, or had increased (for example due to contracting to manage risk).

8.85               The main point is that retailers are required to reasonably pass through any supply chain savings, and this allows a case-by-case, holistic assessment by the ACCC of what is reasonable in the given circumstances. To the extent that retailers reduce their prices, consumers will benefit.

8.86               The contract liquidity limb has been designed to capture unreasonable refusals to contract, where this is done with the purpose of substantially lessening competition. It is not intended to interfere with efficient risk management strategies by electricity corporations (including gentailers). It does not require the cancellation of any contracts which are on foot, nor does it require electricity corporations to fundamentally change their contracting behaviour, unless their current contracting behaviour has the purpose of substantially lessening competition. The limb has a narrow focus on contracting behaviour which has the purpose of substantially lessening competition, which acknowledges that while there may be broader structural issues affecting contract liquidity, they should be addressed outside of this legislative framework. Contracting which is a part of a genuine risk management strategy will not breach the prohibition.

8.87               The Retailer Reliability Obligation ( which commenced on July 2019), contains a form of contracting obligation (the Market Liquidity Obligation) which can be imposed on gentailers in the event that reliability obligations are triggered. As businesses adjust for the Retailer Reliability Obligation, contract liquidity in these States is likely to improve.

8.88               Finally, the wholesale bids and conduct limb has been designed to use terms which are familiar to wholesale corporations, and again has been designed with the operation of the wholesale market in mind. For example, the NEM wholesale spot market operates in such a way that transitory market power is acceptable (indeed, it is considered an efficient signal for new investment). The NEM spot market also allows generators to bid and rebid at a range of prices to reflect the prevailing market conditions of supply and demand at a given time. The prohibition does not seek to prevent these outcomes. Rather, the prohibition seeks to target conduct which is not a part of genuine commercial operation in the market, and seeks to distort or manipulate prices. This limb is split into a basic case, for which contracting orders and divestiture orders are not available, and an aggravated case, which captures more serious conduct for which contracting orders and divestiture orders may be a proportionate response.

8.89               The ACCC is expected to release guidance about its approach to enforcing the prohibitions, to increase market participant certainty.

8.90               The Government expects that electricity corporations will be able to comply with the new prohibitions, as these should reflect the features of a well-functioning electricity market.

The remedies

8.91               The remedies, as detailed in section 2, range from a public warning notice issued by the ACCC up to contracting orders and divestiture. The legislative criteria ensure that the appropriate remedy is selected, through a series of tests, including that the chosen remedy must be proportionate (i.e. no more severe than is necessary to address the prohibited conduct in question). In particular, it is intended that the Treasurer would apply to the Court for a divestiture order only as a last resort, and where the public benefit of such action would outweigh any detriment.

8.92               The remedies are expected to have broader costs and benefits in two ways. Firstly, through their existence, independently of whether they are used, and secondly in the event they are used.

Existence of the remedies

8.93               The prospect of tough remedies, such as the contracting order and in particular the divestiture order, provides a very strong incentive for electricity corporations to avoid breaching the new prohibitions (i.e. to behave in a way that does not hinder effective competition, and is not detrimental to electricity consumers). Given the nature of the remedies, it is possible that their mere introduction to the electricity sector’s regulatory framework imposes some non-regulatory costs and benefits.

8.94               While some of the remedies available are broadly consistent with existing enforcement mechanisms available to the ACCC, such as infringement notices and civil penalties, others are relatively new in their application as remedies rather than voluntary undertakings. For example, Court-ordered divestiture orders are available under the CCA as a remedy for mergers or acquisitions which breach the CCA, and act to unwind the offending transaction. Outside of the CCA and foreign investment framework, divestiture is generally not available as a remedy.

8.95               The submissions to the consultation paper generally expressed concerns that the prospect of contracting orders and divestiture orders as remedies could be expected to negatively impact investor confidence. Submissions argued the prospect of remedies of this nature might either:

•        add a risk premium to investment, as financiers judge that investing in the electricity sector carries greater risks than in the past; or

•        deter future investment, as potential investors may judge that investment in the electricity sector carries greater risks than in the past and that returns on investment may be reduced.

8.96               Each of the above would increase costs to consumers.

8.97               It is difficult to quantify the impacts on investment, given much depends on the nature of the investment (for instance, new build or refurbishment), its location and prevailing market conditions around that investment such as price volatility. In some exercises, it is possible to model the impact on investment through a risk premium which would be imposed on the weighted average cost of capital for generation investment.

8.98               It is not possible to reliably estimate or quantify policy uncertainty for this legislation using such an approach, as there are many factors at play and significant uncertainty as to how they may play out. It is possible to assess that the likely impact of introducing contracting orders and particularly divestiture orders to the regulatory framework would increase the cost of capital, particularly during the initial transitional period under the legislation, but this cannot be quantified with confidence.

8.99               However, with the possibility of introducing additional investor uncertainty in mind, the legislative framework has been designed to put sufficiently clear criteria around when and how the remedies can be used. In particular, divestiture orders may only be made by the Court on the application of the Treasurer.

8.100           In light of this design, potential investors in the electricity sector should not be deterred by the legislative framework, unless their intention is to engage in conduct which is detrimental to competition or consumer welfare.

8.101           Further, as discussed above, over time corporations will become more familiar with the legislation and the ACCC’s approach to enforcement.

Use of the remedies

8.102           In the event the remedies are used, they could be expected to have effects not just on the business which is subject to the order, but on the broader market. As such, the benefits and costs of sanctions will need to be carefully considered as part of the decision-making framework.

8.103           In the case of a Court-ordered divestiture order, for example, it is possible that both the divested and remaining parts of a business could become less efficient as a result. This is particularly so for vertically integrated gentailers, which rely on significant internal efficiencies. At worst, a divestiture order could result in the relevant business becoming unviable. This would not be in the interests of the market, as it could result in fewer competitors, a possible resulting increase in market concentration, and a lessening of competition. Less efficient businesses, or fewer businesses in the market, could in turn result in higher prices for consumers.

8.104           On the other hand, a divestiture order could promote competition, as it may allow for new market entry or for smaller market players to expand and promote competitive pressure for all corporations.

8.105           Before the Treasurer may apply to the Court for a divestiture order, the legislation requires a consideration of the public benefits and detriments of a divestiture order, such that both the ACCC and the Treasurer must be satisfied there would be a net public benefit.

8.106           Similarly, a contracting order could have both costs and benefits, depending on the specific circumstances of the case. For example, it might be possible for prices to increase if vertically integrated generators enter into enough hedging contracts that they lose some of the efficiencies of vertical integration. On the other hand prices could decrease if sufficient contract liquidity allows more efficient hedging of risk for a wide set of market participants.

8.107           With this in mind, one factor which must be considered in making a contracting order is the amount of generation capacity the relevant corporation holds, and the nature of that capacity. This is designed to safeguard against requiring a generator to contract to the point where its own viability becomes questionable. Another factor to be considered is the generator’s commitments to its load of retail customers (if any). This is to ensure that a contracting order does not undermine a gentailer’s ability to supply its retail customers, or expose those customers to risk.

8.108           The exact impact on electricity prices in each market segment will depend on a number of factors, including but not limited to: the concentration of generation market share in each State, the volume of hedge contracts sought by retailers and the extent of spot price volatility over a given period.

8.109           To the extent that a contracting order promotes improved contract liquidity, it would be expected that States with poorer contract liquidity would benefit most.

Conclusion

8.110           Except as described above, it is expected that States and Territories will equally experience the costs and benefits detailed in this section.

8.111           With these costs and benefits in mind, the legislative framework has been designed so as to:

•        carefully prescribe prohibited conduct, so that electricity companies can operate in the market with certainty as to when their conduct will or will not attract the remedies;

•        provide a notice and response process for the tougher remedies, giving the corporation an opportunity to resolve the issue with the ACCC and avoid the application of those remedies;

•        explicitly link the tougher remedies to the types of breaches they are best adapted to address; and

•        subject the tougher remedies to a series of criteria to ensure they are only available where appropriate, for the most egregious conduct.

Option 3: Regulatory burden costings

8.112           Under option 3, electricity corporations will face three sources of regulatory costs.

8.113           Firstly, electricity retailers and generators will incur the regulatory costs associated with the EPM Inquiry, as detailed above.

8.114           Secondly, it is expected that electricity retailers and generators will incur additional legal costs during the initial transitional period, to educate themselves about the new regime and ensure their business practices are compliant. Some businesses may also need to make adjustments to their internal processes, to ensure compliance with the new legislation. These adjustment costs are not expected to be substantial, as the legislation is not intended to interfere with ordinary business practices by electricity businesses (such as good faith bidding behaviour by electricity generators, and contracting as part of genuine risk management strategies). The legislation is targeted toward behaviour which is harmful to competition and detrimental to electricity consumers. In addition, the legislation will commence six months after Royal Assent. This will give the ACCC time to develop guidelines that make the ACCC’s interpretation and enforcement approach clear, which will in turn give corporations greater certainty and guidance around compliance and time to adjust their business practices if required. Once electricity businesses have factored the new regime into their existing practices, it is expected that on average the additional regulatory costs will be minimal. Corporations operating outside of electricity retail, contract and wholesale markets will not need to seek legal advice or adjust their business practices, as the regime is limited to the electricity sector.

8.115           It is estimated that this initial legal advice and once-off adjustments to internal processes will cost businesses approximately $290,000 per year over ten years. This figure is based on the following assumptions, based on the advice and experience of the ACCC:

•        The regime will apply to approximately 90 electricity retail and generation businesses.

•        Of these 90 businesses, 50 are considered larger active retailers and scheduled generators, to which the legislation is primarily directed. These businesses are expected to bear the majority of the regulatory costs associated with the legislation.

-       The costings assume that each of these 50 businesses will seek an average of 75 hours of legal advice and spend an average of 225 hours of internal staff time to adjust their internal practices.

•        Of these 90 businesses, 40 are considered smaller entities (such as smaller wind or solar farm operators) and those operating outside the National Electricity Market, which fall within the scope of the legislation, but are not the entities to which the legislation is primarily directed. These businesses are expected to bear limited compliance costs.

-       The costings assume that each of these 40 businesses will seek an average of 10 hours of legal advice and spend an average of 20 hours of internal staff time to adjust their internal practices, substantially less than those firms to which the legislation is primarily directed.

•        In the above figures, vertically integrated businesses (gentailers) and other corporate groups are counted once, generators and retailers operating in multiple States are counted once.

8.116           Finally, where the ACCC identifies potential prohibited conduct through its EPM Inquiry, it may issue one or more notices under section 155 of the Competition and Consumer Act 2010 to investigate the potential contravention. A section 155 notice may require electricity corporations to provide information, documents or evidence relevant to the potential contravention. It is expected that, each year, only a small number of electricity corporations would be issued with such notices.

8.117           It is estimated that responding to section 155 notices will cost businesses approximately $79,000 per year over ten years. This figure is based on the following assumptions, based on the advice and experience of the ACCC:

•        The ACCC is assumed to issue section 155 notices in relation to two matters each year, issuing 5-10 notices per matter (an average of 15 notices per year). In practice, the ACCC may undertake more or less than two investigations per year, depending on the extent of electricity businesses’ compliance.

•        It is assumed that it will take an average of approximately 110 hours to comply with each section 155 notice, noting that it may take more or less time to comply depending on the precise requirements of the notice.  

8.118           A number of costs fall outside the scope of the Regulatory Burden Measurement Framework, and have been excluded from the regulatory burden costings below:

•        Any compliance costs associated with the REPI recommendations [11] are excluded as those recommendations and any associated compliance costs exist independently of the legislative framework and those compliance costs are not imposed by the legislative framework.

•        Any compliance costs related to, or flowing from, a contravention of the prohibitions, such as the costs of penalties or the costs of seeking judicial or merits review. These are considered costs of non-compliance.

8.119           Similarly, the broader economic costs and benefits associated with the legislation have not been quantified. However a detailed qualitative analysis is provided above in place of costings.

8.120           As the average annual regulatory burden is estimated at less than $2 million per year, Treasury has self-assessed the costs in the table below.

8.121           A regulatory offset has not been identified. However, Treasury is seeking to pursue net reductions in compliance costs and will work with affected stakeholders and across government to identify regulatory burden reductions where appropriate.

Table 8.2 Regulatory burden estimate table - Option 3

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

$0. 79m

$0

$0

$0.79m

Consultation

8.122           The three issues in relation to electricity retail, contract and wholesale markets, which form the basis of the ACCC’s electricity price monitoring inquiry and the prohibitions in this legislative framework, went through extensive consultation processes.

8.123           As part of the REPI, stakeholders had opportunities to make submissions to both an Issues Paper (31 May 2017) and Preliminary Report (13 July 2017), as well as provide comments at public forums. Non-confidential written submissions are available on the ACCC’s website.

8.124           The Government first announced the prohibiting energy market misconduct regime on 20 August 2018, and the ACCC was formally tasked with undertaking the EPM Inquiry by the former Treasurer on the same day.

8.125           In developing the policy underlying the legislative framework, the following objectives were considered crucial:

•        providing a mechanism to ensure effective competition in electricity retail, contract and wholesale markets;

•        providing a mechanism to ensure reduced electricity supply chain costs, resulting from more effective competition, policy reforms and other factors are passed on to consumers;

•        ensuring the framework does not capture legitimate and appropriate behaviour by electricity corporations;

•        ensuring the availability of effective remedies for prohibited conduct; and

•        allowing for effective compliance monitoring and enforcement by the ACCC.

8.126           With this in mind, the policy was developed through targeted consultation with electricity market participants, ACCC, AER, AEMC, Energy Security Board and others.

8.127           On 23 October 2018, the Government released a Consultation Paper containing policy proposals for framing the prohibited conduct, the graduated range of remedies and enforcement, ACCC engagement with corporations and recommendations to the Treasurer, and review processes.

8.128           As part of this process, the Government actively sought submissions from stakeholders representing a wide range of interested parties, including (in addition to those mentioned above):

•        Electricity corporations (both directly and via the Australian Energy Council);

•        The Business Council of Australia; and

•        The Law Council of Australia.

8.129           Submissions closed on 7 November 2018. During the consultation period, 14 submissions were received.

8.130           Submissions generally focused on the merits of the policy, rather than on the design and workability of the legislation. However, the submissions raised some important considerations which were taken into account in finalising the drafting. These related in particular to the framing of the prohibitions to ensure they provide corporations sufficient certainty to continue with genuine pricing behaviour, wholesale market conduct and risk management strategies. Specific comments are discussed above in section 4.

8.131           The Government announced its objective to introduce the legislation before the end of 2018. Given this objective, and the fact consultation has already occurred on the REPI and on the policy design underlying the legislative framework, the Government conducted a short and targeted consultation with stakeholders on draft legislation following the public consultation process. This allowed the Government to identify remaining issues and refine the final drafting of the legislation.

8.132           A key concern raised by stakeholders was around the proposal that, as previously drafted, the Treasurer would be able to make a divestiture order. The Government responded to this concern by providing that a divestiture order can be made by the Court, on the application of the Treasurer, and upon the Court both making a finding that there has been a breach of a prohibition and considering that a divestiture order is a proportionate response.

8.133           A further concern raised by stakeholders was that some of the potential remedies may not be appropriate for particular breaches of the legislation. For example, a divestiture order would likely not be considered ‘proportionate’ or ‘targeted’ to a breach of the retail pricing prohibition, and would therefore be unlikely to satisfy the proposed tests for making an order, but divestiture orders were not explicitly excluded for such a breach. In response to this concern, the contracting order and divestiture order were more explicitly linked to particular breaches. The legislation allows a contracting order for a breach of the contract liquidity limb or the aggravated wholesale limb, but not for the retail pricing limb or basic wholesale limb. Similarly, a divestiture order may only be made for a breach of the aggravated wholesale limb, but not for any other limb.

Reintroduction to Parliament (2019)

8.134           The Bill was introduced to Parliament on 5 December 2018, and lapsed at dissolution on 11 April 2019. Committed to reintroducing the Bill in 2019, the Government has undertaken further targeted consultation on the Bill with key industry stakeholders. The consultation process included a number of meetings between June and August 2019, with the Australian Energy Council, AGL, EnergyAustralia, Origin Energy and the Business Council of Australia.

8.135           Stakeholders suggested a wide range of amendments to the Bill, including significant amendments such as removing the retail prohibition entirely, and converting the contracting order from a ministerial order to a court order. However, such amendments would undermine the policy objectives of the Bill, by removing direct protection for retail customers and significantly delaying the application of the contracting order.

8.136           Stakeholders also suggested a number of minor amendments that focussed on providing additional clarity around some elements of the Bill.

8.137           In response to this further consultation, the Government has made a number of amendments to the Bill. This included amendments such as delaying commencement by six months to address issues with transitional uncertainty, clarifying that the retail pricing prohibition only applies to market offers, and clarifying that the retail pricing prohibition does not require a pricing adjustment where this would be in breach of another Commonwealth, State or Territory law, regulation or rule.

Preferred option

8.138           Of the three options considered, the option that provides the strongest means for achieving the policy objective (as detailed in section 2) is establishing a legislative framework which reflects the Government’s and community’s expectations about acceptable conduct in electricity retail, contract and wholesale markets. A legislative framework provides a clear mechanism to address the identified issues in electricity retail, contract and wholesale markets.

8.139           While options 1 and 2 should theoretically promote more effective competition in electricity retail, contract and wholesale markets, and lead to lower prices for consumers, those outcomes may not eventuate under options which lack strong incentives for compliance.

8.140           Option 2 carries lower regulatory costs than option 3. However, while the ACCC’s public reporting of any unacceptable behaviour in electricity markets may prompt some consumers to move to better deals, disengaged consumers are unlikely to do so and will be disadvantaged under this approach. As discussed in other sections of this document, the electricity market has a number of somewhat unique characteristics, and many consumers do not respond to pricing changes the way they do in other sectors. Option 2 does not guarantee that electricity firms will behave in the interests of their consumers, as it lacks strong incentives for compliance.

8.141           Option 3 carries the highest regulatory costs, as well as the most significant non-regulatory costs. However, option 3 also carries the greatest non-regulatory benefits. Further, the non-regulatory costs under option 3 are expected to be mitigated through the careful design of the legislation, and are also expected to be largely transitional. Once the market gains an understanding of the new legislative framework and adjusts, it is expected that any fear and uncertainty on the part of electricity corporations will be significantly reduced, while the benefits to electricity consumers will be enduring.  

8.142           Option 3 carries the greatest net benefit to the community. While it represents the strongest approach, the level of consumer protection is considered proportionate to the risks of electricity firms engaging in conduct which is harmful to competition and detrimental to consumer welfare (i.e. failing to address electricity affordability, which creates an impediment to accessing an essential consumer good and disproportionately affects consumers in financial hardship). In addition, transitional uncertainty can be more effectively managed during the six months between Royal Assent and the commencement of the legislation.

Implementation and evaluation

8.143           Once the legislation is in place, implementation will be undertaken by the ACCC. It is expected that the ACCC will, in accordance with its usual practice, issue guidelines on its approach to enforcing the legislation.

8.144           The ACCC’s EPM inquiry is due to run for seven years, from 2018 to 2025. The legislation will sunset in 2025, at the conclusion of the monitoring inquiry. However, The Government’s intention is that a review will be conducted in 2024 to determine whether the inquiry and legislative framework should be extended beyond 2025.

8.145           The effectiveness of the legislative framework will be measured with reference to the three problems identified in section 1. The legislative framework will be considered successful if:

•        price outcomes for consumers, both individually and on average reflect underlying wholesale electricity costs;

•        electricity contract markets are sufficiently liquid to allow for competition among retailers; and

•        wholesale electricity markets are characterised by effective competition and competitive constraint.

8.146           The ACCC’s ongoing inquiry is well-suited to monitor these outcomes over time.

 



Chapter 9          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019

9.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

9.2                   Schedule 1 to the Bill implements a comprehensive legislative framework consisting of new prohibitions and remedies tailored to conduct in electricity markets.

9.3                   Schedule 2 to the Bill contains information gathering powers, which will allow the Australian Energy Regulator (AER) to gather and use information about energy businesses.

Human rights implications

9.4                   The Bill engages the right to privacy in Article 17 of the International Covenant on Civil and Political Rights (ICCPR).

Article 17 - Right to privacy

9.5                   Article 17 of the ICCPR prohibits arbitrary or unlawful interference with an individual’s privacy, family, home or correspondence. This can include the collection, security, use, disclosure or publication of personal information.

9.6                   Item 11 of Schedule 1 to the Bill allows the ACCC to use its information gathering powers in Section 155 in relation to an order made by the Treasurer or Federal Court under Part XICA. The evidence that the ACCC may require must relate to such an order, and a notice under section 155 is likely to be given to an officer or employee of a corporation or other body corporate that has been subject to an order that has been made under Part XICA. The information or evidence that they may be required to provide may include evidence about how the corporation or body corporate has complied or is complying with the order. Existing protections relating to self-incriminating evidence and documents that are the subject of legal professional privilege apply unmodified.

9.7                   Item 5 of Schedule 2 to the Bill gives the AER information gathering powers, including the power to require a person to give written or verbal evidence. The evidence must relate to the performance of the AER’s functions under regulations made for section 44AH of the Competition and Consumer Act, including, for instance, the Competition and Consumer (Industry Code-Electricity Retail) Regulations 2019 which prescribes the Retail Electricity Code of Conduct under which the AER determines default offer prices for the supply of electricity to residential and small business consumers. The types of persons who might be required to give such evidence in relation to these determinations would include officers or employees of electricity retailers. The type of evidence they may be required to give would include evidence about the operation of the business, including, for instance, about how retail electricity prices are set and the necessary costs a business incurs to provide such services. Persons cannot be compelled to give self-incriminatory evidence or evidence that is subject to legal professional privilege. The use and disclosure of any evidence collected in this way would be regulated by section 44AAF of the Act.

9.8                   These powers are broadly modelled on the Australian Competition and Consumer Commission’s information gathering powers in section 155 of the Competition and Consumer Act, and will underpin the AER’s role in the delivery of retail market reforms aimed at reducing electricity prices.

9.9                   Item 3 of Schedule 2 to the Bill amends section 44AAF of the Competition and Consumer Act to authorise the disclosure of protected information to another agency if the AER is satisfied that the information will enable or assist the agency to perform its functions or powers. This provision is broadly modelled on section 127(4)(a) of the Australian Securities and Investments Commission Act 2001 and is supported by the COAG Energy Council. This amendment is not targeted at the disclosure of personal information, but is instead intended to facilitate the transfer of information about the energy market to agencies that have an interest in that information.

9.10               Article 17 of the ICCPR relates to the use or disclosure of personal information, while the amendments referred to above are targeted at the collection, use and disclosure of business information. As such, the right to privacy is not affected.

Conclusion                                                    

9.11               The Bill is compatible with human rights because it does not affect the right to privacy under Article 17 of the ICCPR.




[1] The ACCC’s Final Report is available at: https://www.accc.gov.au/publications/restoring-electricity-affordability-australias-competitive-advantage

[2] A joint media release by the then Prime Minister, Treasurer and Energy Minister is available at: http://sjm.ministers.treasury.gov.au/media-release/089-2018/

[3] ACCC REPI Final Report, page 253.

[4] ACCC REPI Final Report, page 264.

[5] ACCC REPI Final Report, page ix.

[6] ACCC REPI Final Report, page 114.

[7] ACCC REPI Final Report, page 96.

[8] ACCC REPI Final Report, page 87.

[9] ACCC REPI Final Report, page 96.

[10] ACCC REPI Final Report, page 357.

[11] In relation to the REPI recommendations, the ACCC’s Final Report was certified in place of a RIS.