Referral of the inquiry
1.1
The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 (the bill) was introduced in the House of Representatives and read a first time on Wednesday, 18 September 2019.
1.2
On 19 September 2019, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report by 7 November 2019.
Purpose of the bill
1.3
This bill amends the Competition and Consumer Act 2010 (Competition Act) to define energy market misconduct and provide a series of penalties and remedies for retailers and generators engaging in misconduct that is prohibited conduct. It also contains provisions that will extend the information gathering powers of the Australian Energy Regulator.
Background
1.4
The bill is part of the government's response to concerns about domestic electricity price increases, particularly on the east coast of Australia. Legislation to provide for public warning notices, court enforceable undertakings and divestitures was foreshadowed in August 2018 by the Turnbull government in its response to the Australian Competition and Consumer Commission's (ACCC) report into retail electricity pricing.
Retail electricity price inquiry
1.5
On 27 March 2017, the then Treasurer, the Hon Scott Morrison MP, directed the ACCC to hold a public inquiry into the supply of retail electricity and the competitiveness of retail electricity prices in the national electricity market.
1.6
The ACCC delivered its final report in June 2018 and stated the approach to policy, regulatory design and promotion of competition in the electricity sector had not worked well for consumers and the National Electricity Market (NEM) needed to be reset. At almost 400 pages, the report outlined the complexity of the NEM and the myriad factors that contribute to the final cost paid by consumers for electricity.
1.7
The ACCC identified the components of a residential bill across the NEM.
1.8
The report identified multiple causes for current problems in the electricity market, spanning networks, generation, solar feed-in tariffs, the renewable energy target, gas availability and retail pricing.
1.9
The ACCC made 56 recommendations across four areas: increasing competition in generation and retail; lowering costs in networks, environmental schemes and retail; improving consumer experiences and outcomes; and improving business outcomes.
Box 1.1: Regulators, laws and terminology
Australian Energy Regulator (AER)
Monitors and enforces compliance with national energy legislation and rules in the wholesale electricity and gas markets in relation to bidding and rebidding, market dispatch and prices, network constraints, demand forecasts, and forecasts of production and capacity. Regulates electricity networks and natural gas pipelines, and retail electricity and gas markets in certain jurisdictions; provides the price comparison website, Energy Made Easy.
Australian Energy Markets Commission (AEMC)
Independent statutory body that makes and amends rules for the NEM, elements of the natural gas market and related retail markets.
Australian Energy Market Operator (AEMO)
Independent energy markets and power systems operator that operates the spot market and dispatch arrangements for the NEM.
National Electricity Law (NEL)
The National Electricity Law is set out in the Schedule to the National Electricity (South Australia) Act 1996 (SA), as applied in the laws of other states, the territories, and the Commonwealth.
National Electricity Market (NEM)
The NEM encompasses South Australia, Tasmania, Victoria, New South Wales, the Australian Capital Territory and Queensland. The NEM wholesale market is where generators sell electricity and retailers buy electricity. Over 300 registered generators sell electricity into the NEM.
1.10
The following discussion covers only a small number of the issues the ACCC identified as contributing to high retail costs. The bill does not address, and neither is it intended to address, the broad range of factors that result in high energy prices for consumers. It is, rather, part of a broader government program of reforms in the sector.
1.11
The following summarises the ACCC's findings with regard to misconduct and sanctions identified in this bill:
correspondence between wholesale and retail prices;
contract market liquidity;
Electricity market misconduct
Retail pricing
1.12
The ACCC stated retail electricity market deregulation has largely fallen short of expectations. Since deregulation in the early- to mid-2000s, there has generally been a trend towards a concentrated, vertically integrated market—companies owning generation and retail (gentailers or generator-retailers). This provides significant scale advantages for the largest companies. It is difficult for smaller companies and new entrants to compete against the large, established customer bases and stable revenue streams of the large tier one corporations like AGL, Origin and EnergyAustralia.
1.13
The ACCC found vertically integrated companies have persistently set transfer prices (the price charged per unit of electricity the generation business produces for the retail business), above generation costs. It identified several reasons a company might do this, including to accrue the economic benefits of vertical integration to the wholesale arm of the business and thereby prioritise wholesale profit. Regardless, the ACCC is of the view the retail market is not imposing a significant competitive constraint on tier one companies and consumers are not receiving the direct benefits of vertical integration—that is, lower prices as a consequence of preferential access to generation capacity and lower wholesale electricity costs.
1.14
Instead of competing on price themselves, the ACCC found evidence to support the suggestion tier one companies allow the smaller and less efficient tier three competitors to set the market price. These tier three companies have little or no generation assets, constrained balance sheets, and small customer numbers. The ACCC agreed with analysis put forward during its inquiry that suggested it would be tier two companies (vertically integrated companies like Snowy Hydro), that would most likely be able to constrain tier one companies, providing they can continue to expand and achieve greater efficiencies.
1.15
Smaller retailers have fewer customers over which to spread fixed costs and fewer options for managing their wholesale risk—they may have trouble accessing key trading platforms, fewer potential trading partners in the over-the-counter (OTC) market, pay more for the contracts they enter, and face more expensive credit requirements. Smaller players are thus more likely to be exposed to wholesale price volatility, which places upward pressure on their retail prices.
1.16
The ACCC made several recommendations to improve consumer interactions with electricity retailers, including: measures to change notices sent at the end of contracts; maximum default offer prices; transparency in discount rates; consumer data rights for data portability; a mandatory code of conduct for third party intermediaries recommending contracts; a national approach to electricity concessions; funding for energy literacy programs; and enforceable hardship guidelines.
1.17
More broadly, the ACCC identified price transparency as one significant barrier to resolving the issue of electricity affordability and recommended a strengthened price reporting function be allocated to the AER, supported by powers to compulsorily obtain information from electricity retailers. This would allow a NEM-wide approach to accurate price monitoring.
Box 1.2: —Buying and selling electricity: spot market and contact market
Spot market
The AEMO manages the electricity system through the spot market. All electricity in the spot market is bought and sold at the spot price; this price tells generators how much electricity the market needs at any particular point in time to maintain the balance between supply and demand. When the spot price increases, generators increase output and more expensive generators turn on to sell extra power, and vice versa.
Spot prices reflect how much electricity is being used—prices are cheaper at times of low demand and higher at times of high demand.
Contract market
Consumers do not pay the spot price—they purchase electricity from a retailer through a contract setting out how much electricity will cost over a fixed period of time. The difference between the fixed price consumers pay and the variable spot price creates risk for retailers. Retailers may sign up new customers at one price but incur higher-than-expected prices in the wholesale market—leaving the retailer out of pocket.
For generators, the spot price is a volatile and uncertain stream of revenue and relying solely upon this price would introduce risk when making business and investment decisions.
Generators and retailers mitigate the risk of spot price changes by agreeing to contract for wholesale electricity at a set price—a hedging contract. These contracts fix the wholesale price retailers pay for electricity over the course of a year or several years.
Hedges do not determine to which retailer each generator's electricity actually flows. Rather, hedging contracts operate separately to balance out the payments made by retailers and received by generators in the NEM wholesale market. For instance, if the NEM spot price is higher than the price agreed under the hedging contract, the generator (who receives the high price) returns the difference in prices to the retailer (who pays the high price). The balancing payments work in the opposite direction when prices are lower than the agreed price.
Contracts in the NEM are traded either on the ASX or bilaterally through the OTC (over-the-counter) market.
Electricity financial contract liquidity
1.18
Contracts agreed in the contract market influence the overall cost each retailer incurs for wholesale electricity, which flows on to the prices charged to consumers. The ACCC examined a number of concerns with the functioning of contract (or hedging) markets.
1.19
Hedging is a major factor in the relative competitiveness of retailers. The ACCC found, amongst other things, that small retailers have significantly fewer options for trading hedge contracts, meaning some small retailers are limited in their ability to manage wholesale risk effectively. Some retailers operate without hedging in place; are only able to hedge on a short-term basis; or must use more expensive types of hedges.
1.20
The ACCC stated retailers that struggle to put in place effective wholesale risk management identify two barriers:
market access and cost (related to the creditworthiness of often small companies, and the minimum trade size required in hedge markets); and
1.21
Market liquidity refers to the ease with which a retailer is able to find a trade to lock in the wholesale prices upon which its retail prices are set. Research conducted by the ACCC showed there is substantial trading and re-trading (liquidity) of energy in some jurisdictions:
in Victoria and Queensland, total trade volumes regularly exceed energy demand; and
in New South Wales, trade volumes are close to demand; but
in South Australia, trading levels are well below the overall demand for electricity.
1.22
Although the causes of the lack of liquidity in the contract market are complex, the ACCC stated the competitive dynamics of contracting markets are likely to reflect competition in the wholesale spot market and retail electricity market. Improving the competitive dynamics in the wholesale and retail markets would have positive flow-on effects to contract markets.
1.23
The ACCC stated that without sufficient competitive pressure in the wholesale and retail markets, vertically integrated companies 'may have the ability and incentive to withhold contracts from rival retailers, or to discriminate against them regarding price'.
1.24
The ACCC found vertical integration reduces overall hedging market activity as generators and retailers that would previously contract with one another are now part of the same business and do not need to participate in hedging markets to the same extent, though they do continue to participate. Six vertically integrated businesses account for nearly 90 per cent of generation capacity.
1.25
Vertical integration allows a company to increase or decrease generation output and facilitates a more flexible and less costly hedging strategy. Establishing and maintaining a portfolio of contracts is a significant undertaking requiring ongoing management and negotiation—vertical integration may alleviate some of these costs.
1.26
With regard to contract liquidity, the ACCC recommended market making obligations be established in South Australia only (with a subsequent review to determine if the obligation should be extended to other regions). This obligation would require large, vertically integrated retailers to make offers to buy and sell specified hedge contracts each day, in order to boost hedge market activity in that jurisdiction.
Box 1.3: How prices are set in the NEM
Generators submit offers to supply the market the day before dispatch occurs. These offers include specified volumes for every 5 minutes at up to 10 different prices. Offers can be adjusted at any time up to the point of dispatch.
From all the bids offered, AEMO decides which generators will be dispatched. The cheapest bids are selected first, then progressively more expensive bids until enough electricity can be dispatched to meet demand. The final bid needed to meet demand (the 'marginal generator') sets the ‘dispatch price’.
A dispatch price is determined every 5 minutes. Every 30 minutes, the 6 dispatch prices for that 30 minute period are averaged to determine the ‘spot price’.
The 30-minute spot price is paid to all generators for their dispatched electricity during that period, regardless of how they bid. A separate spot price is determined for each of the five NEM regions every 30 minutes.
Spot prices are capped at a maximum of $14,200/MWh. A price floor of
–$1,000/MWh also applies.
Market manipulation
1.27
The ACCC found a lack of competitive pressure allows some generators to act in a relatively unconstrained manner. However, there exist legitimate reasons for higher priced offers on the spot market. According to the final report, some recent high wholesale prices are the consequence of:
a shift in the mix of generators supplying electricity and setting wholesale prices as 'marginal generators';
changes in the cost of generation, in particular increases in the costs of gas and black coal; and
the current market structure, including a high level of market concentration.
1.28
In July 2016, the AEMC introduced a revised bidding in good faith rule with the aim of mitigating the number of false or misleading bids made by market participants. This was in response to a practice by Stanwell Corporation to shift offered capacity from low price bands to high price bands close to dispatch—a strategy that tended to lead to higher prices.
1.29
The ACCC found clear instances of market manipulation are not currently a major feature of the electricity market. However, it supports the introduction of a broader market manipulation rule, including powers to prevent businesses from exploiting cross-market positions (across physical and financial markets).
1.30
It stated any market manipulation rule would need to be supported by stronger information, investigation and enforcement powers for the AER. The AER currently has powers under the National Electricity Law (NEL) to require generators to produce documents and provide information on their bidding activities, but it cannot require an individual involved in particular conduct to appear before it and give oral evidence.
1.31
The ACCC recommended the NEL be amended to provide the AER with powers to address behaviour which has the effect of manipulating the proper functioning of the wholesale market, together with the necessary investigation powers and appropriate remedies. It suggested the current market manipulation powers in respect of gas market supply hubs represent a good framework for equivalent powers in respect of the electricity market.
Sanctions
Retail pricing
1.32
The ACCC recommended a NEM-wide price reporting and monitoring framework, and measures to increase transparency and competition as a means to reducing retail prices.
Contracting orders
1.33
As discussed above, the ACCC recommended market making obligations in South Australia only.
Divestiture
1.34
The prospect companies may be forced to divest has generated significant concern within the electricity industry. The ACCC, in its report, noted requiring the divestiture of privately owned assets is an 'extreme measure' to take. It acknowledged concentration in the wholesale market is contributing to current high electricity prices, but stated restoring competition would occur if the recommendations made in the report were implemented. It was not appropriate, according to the ACCC, to intervene to unwind the way the market has evolved across the NEM.
1.35
However, the ACCC did recommend that due to unique circumstances, the Queensland Government should reduce market concentration by dividing its generation assets into three separately owned and operated generation portfolios.
Government response
1.36
The then Treasurer, the Hon Scott Morrison MP, and the then Minister for Environment and Energy, the Hon Josh Frydenberg MP, jointly announced the government's response to the ACCC report. The government undertook to direct the ACCC to hold an inquiry (running to 2025) into prices, profits and margins in the NEM.
1.37
On 21 August 2018, the Government directed the ACCC to undertake the inquiry. The government announced if the ACCC identifies any problems as it undertakes the multi-year inquiry, it would have a range of enforcement remedies and responses, including:
court enforceable undertakings;
the ability to convert a default market offer into binding price cap;
fines and other financial penalties;
extending market making obligations; and
ordering divestiture of assets or parts of an energy business.
1.38
The bill supports the ACCC inquiry—schedule 1 of which ceases to be in force on 1 January 2026. In his second reading speech, the Treasurer,
the Hon Josh Frydenberg MP, said the ACCC's role in monitoring retail prices, wholesale bids and contract market liquidity in the NEM until 2025 would be 'backed up by a series of remedies where the ACCC identifies misconduct by electricity market participants.
1.39
The bill, according to the Treasurer, establishes the misconduct to be prohibited; and targeted, proportionate remedies to apply in respect of misconduct in the retail market, the wholesale market and the contract market.
2018 bill
1.40
This bill is a slightly amended form of a bill first introduced in 2018. The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 (the 2018 bill) was introduced into the House of Representatives on 5 December 2018. It lapsed at the dissolution of the Parliament on
11 April 2019.
1.41
The provisions of the 2018 bill were referred by the Senate to the committee on 6 December 2018. The committee tabled its report on the 2018 bill on 18 March 2019.
1.42
There are minor differences only between the 2018 bill and the 2019 bill (see below). As such, the report on the 2018 bill remains authoritative and should be read in conjunction with this report. This report comments only on submissions received to the current inquiry.
Differences between the 2018 and 2019 bills
Commencement
1.43
Schedule 1, which relates to prohibited conduct in the electricity industry, now commences six months after the Act receives Royal Assent. It previously was to commence the day after the Act received Royal Assent.
Prohibited conduct—retail pricing
1.44
Section 153E clarifies the prohibited conduct with regard to retail pricing applies only to market offers for electricity, not to standing offers. Standing offer prices (default market offers) are regulated under the Electricity Retail Code of Conduct and cannot exceed the amount determined by the AER.
Notices and publication of information
1.45
Section 153P clarifies that the ACCC must give a copy of a prohibited conduct notice to each connected body corporate in relation to the prohibited conduct.
1.46
Under section 153U, the ACCC will no longer publish a 'no Treasurer action notice', it will now only need to be given to the relevant corporation.
1.47
Similarly, under section 153V, the ACCC will no longer publish a variation or revocation of a 'no Treasurer action notice', it will now only need to be given to the relevant corporation.
1.48
Section 153X clarifies the information that must be published when the Treasurer makes a contracting order—the fact the contracting order has been made, the day on which it was made and the name of the body corporate, but not the details of the order.
1.49
Section 153Y clarifies the information that must be published when the Treasurer makes a variation or revocation of a contracting order.
Forced divestiture
1.50
Section 153ZB clarifies but does not substantively change the arrangements in the 2018 bill with regard to electricity divestiture orders for government-owned body corporates.
Liability
1.51
Section 153ZD limits the liability for pecuniary penalties as a consequence of misconduct to directors, secretaries or senior managers of the corporation.
Australian Energy Regulator reporting requirements
1.52
The 2019 bill removes a requirement for certain information about the use of the AER's new compulsory information gathering powers to be disclosed in its annual report.
Amendments to the 2019 bill
1.53
During consideration in the House of Representatives on 23 October 2019, three amendments were made to the bill. These were to the effect:
governments (Commonwealth, state, territory) cannot be forced to divest from companies they partly own;
in the case of divestiture, employees will be 'transferring employees' and retain their entitlements; and
there will be a review of the impact of the Act within four years of it being passed.
Provisions of the bill
1.54
The bill amends the Competition Act and contains two schedules:
Schedule 1—Prohibited conduct in the electricity industry; and
Schedule 2—AER information gathering.
1.55
Schedule 1 inserts a new part into the Competition Act, Part XICA—The Electricity Industry.
1.56
The following table provides a summary of the types of prohibited conduct and possible penalties provided for in Schedule 1.
Table 1.1: Provisions in the bill relating to misconduct
|
|
|
|
|
Retail pricing
|
no
|
Public warning notice
Infringement notice
|
|
Electricity financial contract liquidity
|
yes
|
Public warning notice
Infringement notice
Contracting order*
|
|
Electricity spot market (basic case)
|
yes
|
Public warning notice
Infringement notice
|
|
Electricity spot market (aggravated case)
|
yes
|
Public warning notice
Infringement notice
Contracting order*
Divestiture order*
|
Source: Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
# This is in addition to the penalties already provided for in the Competition Act for misconduct (see below: 'Prohibited conduct—other provisions)
* Must be preceded by a prohibited conduct notice
1.57
Schedule 2, amongst other things, inserts a number of new sections into Part IIIAA—The Australian Energy Regulator, and Part IVB—Industry Codes, of the Competition Act.
1.58
The bill's explanatory memorandum (EM) contains significant detail on how the legislation is intended to operate and how provisions are to be interpreted. References have been made in the footnotes to the relevant sections of the EM where appropriate.
Schedule 1: Division 1—Preliminary
1.59
Division 1 inserts a simplified outline for the part:
stating it will cease to be in force on 1 January 2026;
explaining the part will set out the circumstances in which a corporation engages in prohibited conduct; and
listing the available responses to a corporation engaging in prohibited conduct.
1.60
Division 1 also specifies definitions for interpretation, and the meaning of 'connected body corporate' in relation to prohibited conduct.
Schedule 1: Division 2—Prohibited conduct
1.61
Division 2 establishes four types of prohibited conduct: retail pricing; electricity financial contract liquidity; electricity spot market (basis case); and electricity spot market (aggravated case).
Prohibited conduct—retail pricing
1.62
Under section 153E, a corporation engages in prohibited conduct if it fails to make reasonable adjustments to the price of its market offers to reflect sustained and substantial reductions in its underlying costs of procuring electricity. This section applies to corporations who supply electricity to small customers (residential or small business customers).
1.63
This provision does not apply to standing offers which, under the Electricity Retail Code of Conduct, cannot exceed the amount determined by the AER.
1.64
The EM explains this is a prospective provision relating to possible future circumstances where increased electricity generation or more effective competition, for instance, 'could result in sustained decreases in supply chain costs for retailers'. It provides 11 examples to illustrate what would constitute misconduct under section 153E.
Prohibited conduct—electricity financial contract liquidity
1.65
Section 153F applies to electricity generators and defines prohibited conduct as a corporation doing any of the following for the purpose of substantially lessening competition in any electricity market:
failing to offer electricity financial contracts;
limiting or restricting its offers to enter into electricity financial contracts; or
offering to enter an electricity financial contract in a way that has the effect or likely effect of preventing, limiting or restricting the acceptance of the offer.
1.66
The EM explains the intent of this section is to ensure liquidity in the financial contract market (hedging market), which allows generators and particularly retailers to manage price volatility risk on the spot market.
Prohibited conduct—electricity spot market (basic case)
1.67
Section 153G identifies misconduct as a corporation either bidding or failing to bid in relation to an electricity spot market, and doing so:
fraudulently, dishonestly or in bad faith (153G(b)(i)); or
for the purpose of distorting or manipulating prices in that electricity spot market (153G(b)(ii)).
Prohibited conduct—electricity spot market (aggravated case)
1.68
Section 153H defines misconduct as a corporation either bidding or failing to bid in relation to an electricity spot market, and doing so:
fraudulently, dishonestly or in bad faith, for the purpose of distorting or manipulating prices in that electricity spot market (153H(b)).
1.69
Thus, for an aggravated case a corporation must have been found to have (1) acted fraudulently, dishonestly or in bad faith, and (2) for the purpose of distorting or manipulating the spot market. For a basic case, it must only have been found to have done one of those two.
Prohibited conduct—purpose
1.70
Section 153J applies to cases of prohibited conduct in electricity financial contract liquidity and electricity spot markets (basic and aggravated) and allows the ACCC to infer purpose.
1.71
It specifies that the corporation may be taken to have done something for the purpose of substantially lessening competition in an electricity market or distorting prices in an electricity spot market:
…even though, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.
Prohibited conduct—other provisions
1.72
Section 153K specifies division 2 does not limit the operation of any other provision of the Competition Act.
1.73
This means existing provisions of the Competition Act, such as section 46 relating to misuse of market power, and its associated penalties, continue to apply. Penalties for contravening section 46 are established under section 76 of the Competition Act. If a court determines a contravention of section 46, it may impose orders including, but not limited to:
declaration of a contravention of the Competition Act; and
disqualification of a person from managing a corporation.
Division 3—Commission responses
1.74
In addition to the remedies currently available to the ACCC under the Competition Act, division 3 provides a further two options for the ACCC to respond in relation to cases of prohibited conduct: by issuing a public warning notice or an infringement notice.
Subdivision A—Public warning notices
1.75
Under section 153L, the ACCC may give a corporation in writing a 'draft public warning notice' if it reasonably believes:
the corporation has engaged or is engaging in prohibited conduct;
one or more persons has suffered, or is likely to suffer, detriment as a result of the prohibited conduct; and
it is in the public interest to issue the notice.
1.76
Subsection 153L(2) specifies what must be contained in the notice. The notice is also to state the corporation has 21 days to respond. A 'draft public warning notice', according to subsection 153L(3), is not a legislative instrument.
1.77
Section 153M allows the ACCC to issue a 'public warning notice' if reasonably believes:
the corporation has engaged or is engaging in prohibited conduct;
one or more persons has suffered or is likely to suffer, detriment as a result of the prohibited conduct;
it is in the public interest to issue the notice;
it has given the corporation a draft public warning notice; and
at least 21 days and not more than 90 days have passed since the draft public warning notice was given.
1.78
Subsection 153M(3) details what the notice must contain and subsection 153M(4) specifies the notice is not a legislative instrument.
Subdivision B—Infringement notices
1.79
Section 153N allows the ACCC to issue infringement notices for prohibited conduct in the same way it can under the carbon tax price reduction obligation (sections 60L–60R of the Competition Act).
1.80
Under existing section 60L of the Competition Act, the ACCC can issue an infringement notice if it has reasonable grounds to believe there has been a contravention of a relevant provision. Section 60L(4) details the matters to be included in an infringement notice, including any penalty payable.
1.81
Taken together, proposed subsection 153N(2), subparagraph 76(1)(a)(iiia), and amendments to paragraph 76(1A)(aa) extend existing pecuniary penalty provisions to the prohibited conduct provisions in the new Part XICA. The ACCC can apply to a court for a pecuniary penalty in respect of contraventions of the prohibited conduct provisions.
1.82
The maximum pecuniary penalties applicable to a breach of the prohibited conduct provisions is the greatest of the following:
if the court can determine the total value of the benefits that have been obtained by one or more persons and that are reasonably attributable to the act or omission—three times that total value; or
if the court cannot determine the total value of those benefits—10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the act or omission occurred.
1.83
Under the existing section 60M of the Competition Act, 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 specified in the infringement notice. However, if an infringement notice is not paid (see existing section 60N), the ACCC may take action under Part VI of the Competition Act—Enforcement and remedies.
Division 4—Procedure before contracting order of divestiture order
1.84
Contracting orders can only be applied by the Treasurer, and divestiture orders by the Federal Court upon application by the Treasurer. Prior to either being applied, a number of procedures must be followed, including:
prohibited conduct notices;
prohibited conduct recommendations; and
no Treasurer action notices (if appropriate).
1.85
Each of the above are subject to a range of specifications and time limitations.
Subdivision A—Prohibited conduct notices
1.86
Under section 153P, the ACCC may give a corporation a prohibited conduct notice in writing recommending a contracting or divestiture order if, amongst other things:
the corporation has engaged or is engaging in prohibited conduct;
it is a proportionate means of preventing the corporation from engaging in that kind of prohibited conduct in the future; and
if the order includes a divestiture order, it will result or likely result in a benefit to the public, or in a situation where the benefit to the public is likely to outweigh any detriment.
1.87
Subsection 153P(2) specifies what the notice must contain and allows the corporation 45 days to respond (unless the ACCC decides to allow a later date). Subsection 153P(6) states a prohibited conduct notice is not a legislative instrument.
1.88
Subsection 153Q specifies the conditions under which the ACCC may vary or revoke a prohibited conduct notice and allows, in cases of a variation, the corporation 45 days to respond (unless the ACCC decides to allow a later date). A variation or revocation is not a legislative instrument.
Subdivision B—Prohibited conduct recommendations and no Treasurer action notices
1.89
Under section 153R, within 45 days after the end of the period permitted for the corporation to respond to the prohibited conduct notice or prohibited conduct variation notice, the ACCC must give the treasurer:
a prohibited conduct recommendation in respect of the prohibited conduct notice; or
a no Treasurer action notice in respect of the prohibited conduct notice.
1.90
Section 153S deals with the prohibited conduct recommendation (that is, one recommending a contracting or divestiture order) the ACCC may give to the Treasurer if the following conditions, amongst others, are satisfied:
the corporation has engaged or is engaging in prohibited conduct;
it is considered a proportionate means of preventing the corporation from engaging in that kind of prohibited conduct in the future; and
if the order includes a divestiture order, it will result or likely result in a benefit to the public, or in a situation where the benefit to the public is likely to outweigh any detriment.
1.91
Subsection 153S(2) deals with the content of the notice.
1.92
Subsection 153S(3) allows the recommendations stated in the notice to be different from those stated in the prohibited conduct notice provided to the corporation (paragraph 153P(2)(d)). Subsection 153S(6) provides that a prohibited conduct recommendation is not a legislative instrument.
1.93
Section 153T allows the ACCC to vary or revoke a prohibited conduct recommendation to the Treasurer providing certain conditions are met. In cases of a variation, these conditions include:
the variation is minor or insubstantial, or
the corporation provided false or misleading material or failed to give the ACCC information relevant to the prohibited conduct notice that is not publicly available, and the variation is reasonably necessary to address this; and
the variation is reasonably necessary to address information not in existence or the ACCC did not have when the prohibited conduct notice was given.
1.94
Under subsection 153T(7), variations or revocations are not legislative instruments.
1.95
Section 153U establishes the conditions for a 'no Treasurer action notice' in cases where the ACCC considers it is not appropriate to give the Treasurer a prohibited conduct recommendation in respect of the prohibited conduct notice.
1.96
Section 153V allows the ACCC to vary or revoke a no Treasurer action notice in certain circumstances, including that the corporation gave the ACCC false or misleading information or failed to give information relevant to the prohibited conduct notice that is not publicly available; or the revocation is reasonably necessary to address information not in existence or that the ACCC did not have when the prohibited conduct notice was given. Such a notice is not a legislative instrument.
Division 5—Contracting orders
1.97
If certain conditions are met, in cases of misconduct in electricity financial contract liquidity or electricity spot market (aggravated case), the Treasurer may make a contracting order.
Subdivision A—Treasurer may make contracting orders
1.98
If contained in a prohibited conduct recommendation from the ACCC, the Treasurer may make a contracting order providing the conditions specified in section 153W are met, including that such an order is a proportionate means of preventing the corporation engaging in future prohibited conduct. The order need not be exactly the same as that recommended by the ACCC in its prohibited conduct recommendation, it must be 'of a kind' stated in the recommendation.
1.99
Section 153X specifies the Treasurer may, in writing, order the body corporate to make offers to enter into electricity financial contracts, and details what the order must contain. In particular it must specify (subsection 153X(3)):
the kind of offers that the body corporate must make to enter into electricity financial contracts;
the manner in which the body corporate must make those offers;
the kind of entities to which those offers must be made;
the period or periods during which the body corporate must make those offers; and
any other matter that the Treasurer considers necessary for the order to be effective.
1.100
Further, the order may specify the kind of offers the corporation must make in any of the following ways (subsection 153X(4)):
(a)
the kind of electricity financial contracts that must be offered;
(b)
the price or range of prices in respect of electricity under the electricity financial contracts that must be offered, or a method or methods of working out that price or that range;
(c)
the minimum number of megawatt hours of electricity to which the electricity financial contracts that must be offered must relate.
1.101
Section 153Y provides for the variation and revocation of a contracting order under certain circumstances.
Subdivision B—Enforcement of contracting orders
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Section 153Z provides for situations where the Treasurer has made a contracting order and the ACCC considers the corporation has failed to comply with the order. In such cases, it may apply to the court to order compliance with the order.
1.103
The EM states 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.
Divisions 6—Electricity Divestiture Orders
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In instances of electricity spot market (aggravated case) only, section 153ZA allows the Treasurer to apply to the Federal Court for a divestiture order if certain conditions are met. These conditions include:
the ACCC has given the Treasurer a prohibited conduct recommendation and the order is 'of a kind' recommended by the ACCC;
the order is a proportionate means of preventing the relevant corporation from engaging in that kind of prohibited conduct in future; and
the order will result or is likely to result in a benefit to the public, or in cases where they may be a detriment, the benefit is likely to outweigh the detriment.
1.105
Section 153ZB specifies the conditions for the court making a divestiture order, including that the conduct is prohibited conduct (electricity spot market aggravated case), and divestiture is a proportionate means of preventing the relevant corporation from engaging in that kind of prohibited conduct in future.
1.106
In particular, this section also makes provisions for non-government and government owned corporations/body corporates. In the case of non-government body corporates, section 153ZB(2) allows the court to order the body corporate to:
(a)
dispose of interests in securities or assets, other than to any of the following:
(i)
another body corporate that is related to the body corporate;
(ii)
an associate of the body corporate…
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In cases where the body corporate is an authority of the Commonwealth, state or territory, under subsection 153ZB(3), the court may order the body corporate to:
(a)
dispose of interests in securities or assets to:
(i)
if the body corporate is an authority of the Commonwealth—an authority of the Commonwealth that is genuinely in competition in relation to electricity markets with the body corporate in relation to which the order is made; and
(ii)
if the body corporate is an authority of a State or Territory—an authority of that State or Territory that is genuinely in competition in relation to electricity markets with the body corporate in relation to which the order is made…
1.108
The bill specifies in 153ZB(4):
To avoid doubt, the Court cannot make an order under subsection (3) for the body corporate to dispose of interests in securities or assets otherwise than in accordance with paragraph (3)(a).
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An order made by the Court must specify (subsection 153ZB(5)):
(a)
the interests in the securities and assets, or the kinds of interests in the securities and assets, that the body corporate must dispose of; and
(b)
the day by which the disposal must be made; and
(c)
any other matter that the Court considers necessary for the order to be effective.
Division 7—Miscellaneous
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Section 153ZC applies to proposed contracting and divestiture orders, and related provisions. It specifies (in subsection 153ZC(2)) the provision has no effect to the extent its operation would result in the acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution), otherwise than on just terms.
1.111
Such a situation may occur where an order for divestiture resulted in a sale of an asset to another party on terms that may be considered less that just due to the enforced sale reducing the value of the asset.
1.112
Section 153ZD applies to orders against certain individuals. In certain circumstances, individuals who have been involved in contraventions of the prohibited conduct provision may be liable for a pecuniary penalty. This section limits the liability for pecuniary penalties to directors, secretaries or senior managers of the corporation.
Part 2—Other amendments
1.113
Part two of schedule 1 contains a number of amendments. Item 12 extends the ACCC's information gathering powers to cover instances of contracting and divestiture orders.
1.114
The EM explains this will ensure the ACCC can gather information relevant to determining whether a body corporate has complied with a Treasurer's contracting order.
Schedule 2—AER information gathering and industry codes
1.115
Schedule 2 inserts several new sections into Part IIIAA—The Australian Energy Regulator (AER) of the Competition Act. This part of the Competition Act encompasses the establishment of the AER, functions and powers, and various administrative provisions.
1.116
The schedule also contains amendments to Part IVB—Industry Codes of the Competition Act.
Item 2—regulations
1.117
Item 2 includes amendments to the effect the AER will be able to make legislative instruments consistent with its functions. These legislative instruments will not be disallowable. This includes the AER's function of determining the amounts retailer standing offer prices cannot exceed.
Item 3—Confidentiality
1.118
The AER is currently limited in its ability to share information it obtains in the course of its business. Item 3 inserts new subsections (44AAF(3A), 44AAF(3B)) that will allow the AER to disclose certain information to a wider range of entities:
(b)
a body (whether incorporated or not) established or appointed for a public purpose by or under a law of the Commonwealth;
(c)
a body established or appointed by the Governor General, or by a Minister, otherwise than by or under a law of the Commonwealth;
(d)
the holder of an office established for public purposes by or under a law of the Commonwealth.
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This will be permitted if disclosure of the information will enable or assist such entities to perform their functions or powers.
Items 5—Power to obtain information and documents
1.120
Item 5 inserts several new sections. Section 44AAFA will allow the AER to require a person to provide information, documents or evidence if the AER requires this for the performance of its functions. The section specifies that written notice must be given, and the matters to be included in the written notice.
1.121
Section 44AAFB establishes as an offence, a failure to comply with notice to give information. It also provides certain conditions that apply to consideration of whether an offence has been committed. For instance, an offence may not be committed if a person can show they are not capable of complying with the notice. No offence may be committed if a person can prove that, after a reasonable search, the person is not aware of the documents requested by a notice given under section 44AAFA.
1.122
Section 44AAFC allows the AER to inspect, copy and retain documents produced under section 44AAFA.
Commencement of the bill
1.123
Schedule 1 commences the day after the end of the period of 6 months beginning on the day the Act receives Royal Assent.
1.124
Schedule 2 commences the day the Act receives Royal Assent.
1.125
Sections 1 to 3 and any other provision in the Act commences the day the Act receives Royal Assent.
Schedule 1 Application (item 14)
1.126
Item 14 specifies that with regard to prohibited conduct, the amendments made in parts 1 and 2 of schedule 1 apply in relation to:
(a)
conduct that is engaged in on and after the commencement of this schedule; and
(b)
conduct that was engaged in before that commencement, and is continued to be engaged in on and after that commencement.
Consultation on the bill
1.127
The bill primarily provides the legislative framework for the ACCC's electricity price monitoring inquiry by establishing prohibited conduct and remedies.
1.128
The government announced the ACCC's electricity price monitoring inquiry on 20 August 2018. It subsequently conducted a 'targeted consultation' with electricity market participants, the ACCC, AER, AEMC, Energy Security Board, and others prior to releasing a consultation paper on 23 October 2018. This paper contained policy proposals for framing the prohibited conduct and remedies.
1.129
During the consultation period, the government received 14 submissions, some of which raised concerns about the framing of the prohibitions, and requested certainty over genuine pricing behaviour, wholesale market conduct and risk management strategies. The government made drafting amendments with regard to divestiture orders, and to explicitly link contracting orders and divestiture orders to particular breaches. The bill was introduced to Parliament on 5 December 2018 and lapsed at dissolution on 11 April 2019.
1.130
Between June and August 2019, the government held meetings with the Australian Energy Council, AGL, EnergyAustralia, Origin Energy and the Business Council of Australia. These stakeholders recommended a wide range of amendments. Some of these proposals—such as removing the retail prohibition entirely, and converting the contracting order from a ministerial to court order—the government considered would undermine the policy objectives of the bill.
1.131
The government did, however, make some minor amendments including delaying commencement, and clarifying the retail prohibition applies to market offers and does not apply where it would be in breach of another Commonwealth, state or territory law, regulation or rule.
Legislative scrutiny
1.132
The Standing Committee for the Scrutiny of Bills raised concerns that the bill reverses the evidential and legal burden of proof in relation to offences created in Schedule 2 under proposed subsection 44AAFB(1)—failure to comply with a notice to produce documents or information given under proposed section 44AAFA.
1.133
The Scrutiny Committee stated proposed subsection 44AAFB(2) provides an exception (offence-specific defence) to the offence, stating the offence does not apply if the person is not capably of complying with the notice. This reverses the evidential burden of proof.
1.134
Additionally, proposed subsection 44AAFB(3) provides a further exception if the person can prove that, after a reasonable search, they are not aware of the documents specified in the notice. The Scrutiny Committee is of the view this imposes a legal burden of proof on the defendant to prove that after a reasonable search, they are not aware of the documents.
1.135
The Scrutiny Committee stated:
At common law, it is ordinarily the duty of the prosecution to prove all elements of an offence. This is an important aspect of the right to be presumed innocent until proven guilty. Provisions that reverse the burden of proof and require a defendant to disprove, or raise evidence to disprove, one or more elements of an offence, interferes with this common law right.
1.136
As the reversal of the burden of proof undermines the right to be presumed innocent until proven guilty, the Scrutiny Committee called for a full justification to be provided each time the evidential or legal burden is reversed, with the rights of people affected being the paramount consideration. Such a justification was not provided in the bill's EM. The Scrutiny Committee requested the Treasurer's advice as to why it is proposed to use offence-specific defences, which reverse both the evidential and legal burden of proof.
1.137
The Treasurer, the Hon Josh Frydenberg MP, responded the reverse burden of proof is appropriate in the circumstances of the 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.
1.138
The Treasurer further stated investigations would be costly and difficult if the burden of proof was not reversed. The prosecutor may have difficulty assessing 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 undermine the effectiveness of the information gathering regime and the ability of the AER to perform its functions.
1.139
The Scrutiny Committee noted the Treasurer's advice and requested key information provided by the Treasurer be included in the EM, noting the importance of this document as a point of access to understanding the law and if necessary, as extrinsic material to assist with interpretation. The Committee made no further comment on the matter.
1.140
The Parliamentary Joint Committee on Human Rights found the bill did not raise any human rights concerns.
Regulatory impact
1.141
The government states it considered three options and has adopted a policy that agrees to implement all or some of the ACCC's recommendations, and implement an ongoing electricity price monitoring inquiry with remedies or sanctions available to address any misconduct identified by the ACCC. The average annual regulatory burden is estimated at less than $2 million per year. The following have been excluded from the regulatory burden costings: compliance costs associated with the implementation of the ACCC's recommendations; and compliance costs flowing from a contravention of the prohibitions.
1.142
The government acknowledges electricity corporations may face three sources of regulatory cost:
the electricity price monitoring inquiry;
education and compliance costs in the initial transition period; and
responding to notices under section 155 of the Competition Act with regard to a potential contravention.
1.143
With regard to the ACCC's electricity price monitoring inquiry, regulatory costs will be incurred insofar as the ACCC issues information-gathering notices under section 95ZK of the Competition Act to electricity corporations. Compliance with such notices is expected to cost businesses approximately $420,000 each year over ten years, based on the following assumptions:
the ACCC will issue approximately 80 information-gathering notices each year; and
it will take an average of approximately 110 hours to comply with each notice, depending on the precise requirements of the notice.
1.144
Electricity retailers and generators are expected to incur additional legal costs during the initial transition period to understand the new requirements and ensure business practices are compliant. The government does not expect any adjustments to internal processes to be substantial.
1.145
In the six months between Royal Assent and the legislation's commencement, the ACCC will issue guidelines for industry on its interpretation and enforcement approach. This, according to the government, will give corporations certainty and time to adjust business practices. The government estimates initial legal advice and once-off adjustments to internal processes will cost businesses approximately $290,000 per year over ten years, based on the following assumptions:
approximately 90 electricity retail and generation businesses will be affected by the legislation, but the legislation is primarily directed at the 50 largest and most active;
the largest and most active will bear the majority of the regulatory cost, requiring them to seek an average of 75 hours of legal advice and spend an average of 225 hours of internal staff time to adjust internal practices; and
the 40 smaller entities and those operating outside the NEM are expected to bear limited compliance costs—10 hours of legal advice and 20 hours of internal staff time to adjust internal practices.
1.146
The government estimates responding to section 155 notices from the ACCC will cost businesses approximately $79,000 per year over ten years, based on the following assumptions:
the ACCC will issue section 155 notices in relation to two matters (investigations) each year, issuing 5–10 notices per matter; and
it will take approximately 110 hours to comply with each section 155 notice.
Conduct of the inquiry
1.147
The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 3 October 2019.
1.148
The committee received 19 submissions, which are listed at Appendix 1, as well as answers to questions on notice. The committee held one public hearing on 30 October 2019. The names of witnesses who appeared at the hearing are at Appendix 2.
1.149
Hansard references throughout this document relate to the proof Hansard. Page numbering may differ between the proof Hansard and final Hansard.
Acknowledgements
1.150
The committee thanks all individuals and organisations who assisted with the inquiry.