2.1
This chapter examines views made to the inquiry on the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 (the bill).
2.2
The majority of comment on the bill related to schedule 1—prohibited conduct in the electricity industry. There was some support for the bill. However, many submitters expressed disappointment no significant amendments were made prior to the bill's re-introduction—though the amendments desired varied. Others stated the legislation is not likely to lead to lower prices.
2.3
A key concern with the bill is the significant ambiguity in the definitions around which prohibited conduct is established and the remedies are constructed. As a consequence, some submissions argued the bill will create complexity and uncertainty, result in legal challenges whose costs will be passed to consumers, and will discourage investment in required new and replacement electricity generation.
2.4
Evidence to the inquiry encompassed broad views on the bill, and more specific issues relating to prohibited conduct and remedies. With regard to broad views, the following issues were raised:
duplication of existing laws;
relationship to the Australian Competition and Consumer Commission (ACCC) retail price inquiry;
application beyond the National Electricity Market (NEM);
potential for market intervention measures to be introduced in other parts of the economy; and
complexity and uncertainty.
2.5
More specifically, submitters questioned whether the various prohibited conduct provisions are required, and raised a number of other concerns, including:
retail provisions—the need for clarity;
contract market—that legitimate market behaviour might be construed as misconduct; and
forced divestiture—the possibility for distortion.
2.6
On remedies, the following concerns were raised:
threshold of reasonable belief and inferred purpose;
timeframes and opportunities for responding to notices;
differences permitted between notices;
workability and appropriateness of contracting orders; and
the proportionality of divestiture in the case of spot market misconduct.
2.7
In relation to schedule 2, which deals with Australian Energy Regulator (AER) information gathering, the committee was advised of concerns the expanded information gathering powers might affect the relationship between the regulator and the industry.
Broad views of the bill
Duplication
2.8
Many submissions argued there is no 'gap' in the law; the conduct the bill prohibits is captured by existing laws and regulations, including:
Competition Act as it currently stands (misuse of market power and exclusive dealing, misleading and deceptive conduct under the Australian Consumer Law, and ACCC compliance and enforcement powers);
National Electricity Law and National Electricity Rules (regulation of dispatch offers, bids, and rebids);
Retailer Reliability Obligation—Market Liquidity Obligation (financial contract availability);
default market offer and Victorian default offer (retail price regulation); and
Corporations Act 2001 (market manipulation including in the electricity contracts market).
2.9
The Grattan Institute stated no reasons have been provided as to why existing legislation and rules cannot be used or tightened to address the misconduct identified in the bill. It supports a rules-based approach to regulation, through existing agencies.
2.10
Snowy Hydro stated the legal frameworks in the sector have been strengthened in recent years including under the 2016 Australian Energy Market Commission (AEMC) good faith rebidding requirements for the spot market, and the 2019 regulation of retail tariffs under the default market offer arrangements. It warned against the impact of hastily-considered change on current laws:
The National Electricity Rules in particular is the product of years of refinement through the ‘rules change’ process managed by the Australian Energy Markets Commission. In this environment, caution must be exercised when seeking to impose new restrictions which do not adequately take account of, or harmonise with, existing laws.
2.11
The Australian Energy Council stated substantial risks arise from implementing duplicative, sector specific regulations that mitigate conduct already prohibited in the competition laws. Any previous guidance around the competition laws and the electricity sector, particularly the application of section 46 of the Competition Act, will no longer be applicable and will create uncertainty.
2.12
The Law Council agreed, raising particular concern that the divestiture provisions create significant inconsistency with the wider legislative regime for the regulation of market power under Australian competition law. It also suggested the legislation is unique in that it is industry-specific and is not trying to deal with a monopoly situation.
The bill's relationship to the ACCC report
2.13
The bill is intended to support the ACCC's ongoing inquiry into misconduct in the NEM, announced by the government in response to the ACCC's report into retail electricity pricing (see chapter 1). The bill's explanatory memorandum (EM) notes the government is progressing a number of the ACCC's recommendations in conjunction with this measure.
2.14
However, several submissions argue provisions in the bill have not arisen out of any representations from the ACCC or the ACCC retail pricing inquiry; neither will they significantly reduce retail electricity prices.
2.15
The Grattan Institute stated retail misconduct (as identified in the bill) has not been identified as a problem by the ACCC, neither has contract market liquidity and spot market fixing. It was noted the ACCC's recommendation for contracting orders was limited to one state, and divestiture is an extreme remedy in the context of the findings of the ACCC, and was not ultimately recommended.
2.16
The Law Council of Australia stated there has not been a proper analysis as to whether this legislation is a proportionate response to the issues identified by the ACCC in its report. The Grattan institute stated the ACCC's report 'does not provide cover or substance for the proposals in this particular piece of legislation'.
2.17
Submitters suggested a broad range of issues have contributed to higher retail prices, including:
imbalance of supply and demand in the wholesale market due to the withdrawal of ageing thermal capacity and constrained output from existing generators;
lack of investment in new capacity and transmission;
increased market concentration;
regulatory and policy uncertainty;
increasing generation fuel costs, including rising gas prices; and
the effects of privatisation that resulted in a loss of productivity, increasing finance and banking costs, and growing numbers of people being employed for advertising, sales and contract administration.
2.18
EnergyAustralia, and others, submitted there is no evidence to suggest the bill will reduce electricity prices, and given the uncertainty it introduces, may have the opposite effect. It, and others, urged the government to adopt the recommendations of the ACCC inquiry to reduce electricity prices.
2.19
The Grattan Institute referred to an ACCC calculation that suggested if the full suite of recommendations from the report was adopted, average annual residential bills would fall by 20–25 per cent or $291-$419 over the next three years—though most of the fall in wholesale prices (as a component of electricity prices) would happen regardless of the recommendations being implemented. Based on the ACCC's analysis, the Grattan Institute suggested the annual savings attributable to the bill could be $33–$58, or 2.3–3.4 per cent over the next three years. However, there has been no actual economic analysis of the benefits that might flow from the bill.
2.20
By contrast, Mr Dylan McConnell suggested the ACCC report had identified manipulation in wholesale markets and had recommended additional powers for the AER. Further, he argued there are some very clear cases of market misconduct that need to be addressed—particularly in the wholesale market.
Application of the legislation
2.21
The Northern Territory Government questioned the broad scope of the legislation, in particular that the bill is intended to provide the ACCC with powers to respond to misconduct it identifies through its ongoing electricity price monitoring inquiry across the NEM. Although the ACCC's scope is limited to the NEM, the bill will apply nationwide, including areas not connected with the NEM and in areas where need for the bill has not been demonstrated.
2.22
Instead, the Northern Territory Government suggested the proposals in the bill should be considered by the Council of Australian Governments Energy Council for implementation in the NEL. This would provide an avenue for NEM-only application and for modifications to be considered for the Northern Territory, where there are significant differences in the supply industry and where the transition to a wholesale energy market may be hindered by the bill.
Applying provisions more broadly
2.23
Many submissions were concerned measures in the bill might be applied more broadly once they have been introduced in the electricity sector; others welcomed this potential.
2.24
Several submitters, including the Business Council of Australia, stated market intervention, through contracting and divestiture orders in the energy sector, sets a dangerous precedent for other sectors of the economy including grocery, petrol, banking, and insurance. Some suggested there is a potential for such intervention to establish sovereign risk and send a signal to the world that investing in Australia comes with considerable uncertainty.
2.25
With regard to retail pricing, Craig Emerson suggested the bill would provide the Commonwealth the power to regulate the margins of electricity retailers. This, it was argued, is a form of price control that could be extended to other industries according to the political sensitivities of the government of the day.
2.26
In contrast, other submissions suggested a broader application for some provisions in the bill, particularly the divestiture order. The Grattan Institute noted that unlike other countries, the body responsible for addressing market competition and anti-trust activity does not have the power to break up companies when market concentration is preventing or substantially lessening competition. It suggested if the government is genuinely concerned about the issue, it should review the Competition Act with a view to possibly including this power more generally.
2.27
The Consumer Action Law Centre argued contracting orders and divestment should be available to the ACCC in relation to all types of misconduct, subject to application to a court to ensure consistency with other areas of law. These remedies should not be limited to prohibited conduct in the wholesale electricity market, but available as a remedy for competition law breaches across the economy. The centre argued divestment is not unusual internationally in the context of anti-trust, and is already a remedy available to a court under section 81 of the Competition Act where a merger contravenes section 50 of the Act.
2.28
The Electrical Trades Union of Australia and Mr Dylan McConnell also supported the expansion of the divestiture provision to the broader economy. Mr McConnell stated:
It's also worth pointing out that many other jurisdictions around the world have this power [divestiture], and they have functioning electricity markets. Indeed, they have more investment in their electricity markets than we do at the moment in Australia. So I think some of the fearmongering around this particular part of this is, essentially, vested interests talking their own books, to some extent.
Complexity and uncertainty
2.29
A common theme in submissions, discussed at several points in this chapter, is the uncertainty introduced by the bill—primarily due to untested ambiguity in the definitions. The Australian Energy Council stated, 'It is not clear. It is not simple. It is not predictable'.
2.30
AGL reflected the views of many submitters when it argued:
The provisions of the bill are unclear and likely to be uncertain in operation. A number of the key provisions use broad, vague and inadequately-defined concepts. The bill is therefore inherently subjective and complex, and open to multiple interpretations. The uncertainty of the bill creates vague obligations and market participants will be unable to determine what is required in order to comply with its provisions…It will be difficult for market participants to predict how regulatory powers will be exercised by the ACCC and the Treasurer.
2.31
It was put to the committee that the bill would require companies to modify their behaviour and this would affect electricity businesses and prices in unpredictable ways.
2.32
The Law Council stated:
The provisions are extremely subjective. They're introducing some new concepts that in some cases aren't previously understood or do not already have a history of case law or even ACCC action behind them. So it's hard for companies and their advisers to know exactly how this will be interpreted.
2.33
The ACCC acknowledged there are some novel concepts from the perspective of the Competition Act in relation to the provisions, but it would give guidance in the six months before the prohibited conduct provisions come into force.
2.34
The Department of Environment and Energy, referring to ACCC research, emphasised that a principles-based approach to the application of the legislation is necessary given the wide scope of conduct that may amount to manipulation; it is not possible to craft a highly specific set of rules. Further, there are significant differences across the country in how prices are structured, making prescriptive national-level laws difficult.
2.35
Regardless of any difficulties in interpreting the legislation, Energy Locals suggested companies would have sufficient opportunities to modify their behaviour before the more serious penalties of contracting orders or divestiture are reached. Mr Adrian Merrick stated:
I think we should focus on the ability of all energy companies, including ours, to do the right thing and continue doing the right thing in order to avoid that happening. Only repeated non-compliance would lead to the much discussed big stick and the associated divesture orders.
2.36
The Department of Environment and Energy also stated:
The bill itself supports well-functioning, competitive markets. To the extent to which our wholesale contracts and retail markets work as they're intended and competitively, the bill will essentially have no impact, because those businesses will be compliant and not in breach of those prohibitions. The extent to which the bill can actually impact on investor certainty will be dependent on which of those investors go into the process and potentially commit breaches. The industry working as it should will mean that the bill shouldn't have an impact on how it behaves, because it's intended only to impact on parties that are behaving in a non-competitive manner.
Views on prohibited conduct
2.37
Many submissions argued there is no need for the prohibited conduct provisions in the bill. Submissions suggested the definitions of this prohibited conduct are unclear and uncertain, and there are likely to be unintended consequences.
Retail pricing
2.38
Section 153E of the bill defines prohibited conduct in relation to retail pricing. A number of points were raised over these provisions including:
they are not required given recent regulatory changes;
they will compress margins;
key terms remain undefined;
the definitions set too high a standard for prohibited conduct; and
there will be adverse consequences for consumers.
2.39
Several submitters suggested amendments to the bill to address their particular concerns.
Need for a retail misconduct provision
2.40
The Australian Energy Council stated that since the drafting of the 2018 bill, there has been a fundamental shift in the structure of the retail regulatory framework. Where previously retail pricing had been de-regulated it is now re-regulated with price caps for customers who do not engage in the competitive market.
2.41
Several submitters suggested that the introduction of the default market offer (DMO) on 1 July 2019 and the Victorian default offer (VDO) have addressed initial concerns about complex, confusing and inflated price offerings. Under the DMO, the AER can impose a cap on retailers' electricity contracts. The ACCC's second report under its price monitoring inquiry has recently confirmed the DMO is having the intended effect.
2.42
In arguing section 153E(1) is no longer necessary to achieve underlying policy objectives, the Law Council of Australia stated if the provision is retained there is potential for it to add complexity and cost to the operation of the retail electricity market, with no certainty it will result in net benefits to small customers.
2.43
In particular, the Law Council suggested section 153E(1) will make it more difficult for tier two and tier three retailers to enter electricity markets and grow in the face of competition from larger incumbents (which are more efficient). If every corporation is being forced to pass on cost reductions, it would be harder for smaller electricity players (who have higher costs) to compete in price and innovation.
2.44
The Department of Environment and Energy acknowledged prices under the DMO and VDO are capped by relevant Commonwealth and state regulations to reflect the cost of procuring energy. Without the bill, the department argued, retailers could potentially increase market offer prices even where costs are reduced.
Compressed margins as the benchmark
2.45
The Law Council of Australia suggested the design of the retail pricing prohibition proceeds on the assumption the starting price for each electricity retailer at the time of commencement will be cost-reflective. This may not be the case. For instance, retailers may, for their own reasons, absorb costs in the short term and rely on later reductions in input costs to recoup the loss.
2.46
Other submissions suggested similar scenarios. Craig Emerson argued the bill would regulate retail margins at the level prevailing when the retail prices are high. This is when it is more likely retailers are absorbing some wholesale cost increases rather than passing them to consumers in their entirety. Margins, at this time, are at their smallest. Unless the compressed margin is maintained when wholesale costs fall, the retailer might be considered to have engaged in prohibited conduct. Whilst this margin might cover variable costs, it would not be sufficient to justify new investments.
2.47
A similar argument was advanced by EnergyAustralia, which suggested if a retailer, for the purpose of acquiring customers, reduces retail prices for a short period and the wholesale energy costs decrease at the same time, the discounted price could inadvertently become the baseline price.
Definition of prohibited conduct
2.48
In defining prohibited conduct in retail pricing, the bill introduces a number of concepts, including 'reasonable adjustments', 'sustained and substantial reductions', and 'underlying cost of procuring electricity'. These terms are not defined in the bill though the EM contains a significant amount of information that attempts to provide an explanation for prohibited conduct in different circumstances.
2.49
Despite the detail provided in the EM, submissions suggested there remains significant ambiguity as to what constitutes prohibited conduct. There is concern that if the guiding principles on how the provisions are to be interpreted do not appear in the bill, the regulator will not be required to take them into account. Further, there are concerns whether the forthcoming ACCC guidelines will resolve all the complex issues raised by the drafting of the bill.
General views
2.50
Broadly, the Law Council of Australia suggested the key definitional element—that a corporation has failed to make reasonable adjustments to reflect sustained and substantial reductions in its underlying costs of procuring electricity—is vague and subjective. It stated:
As a general proposition, legislation prohibiting conduct should define that conduct in a manner that allows corporations subject to it to determine, with reasonable certainty, conduct that is or is not likely to be prohibited by the legislation. The current definition used does not meet that standard and raises real questions of fairness and equity as a result.
Reasonable adjustments
2.51
The Law Council suggested the notion of 'reasonable adjustments', as used in the bill, is not a concept for which there is any established body of economic principle or legal precedent that would provide meaningful guidance as to the application of this concept. It does not connote any settled economic or legal meaning and is entirely subjective.
2.52
Where legislation imposes price controls, the Law Council argued, the substantive principles applied to determine the relevant price and the procedural decision making process by which a determination is made, should be specified. As it currently stands, the council wrote, retailers would have to make pricing decisions having regard to a vague and subjective standard—that of reasonable adjustments.
2.53
AGL suggested the EM confuses the concepts it seeks to apply and is internally inconsistent. It argued the EM states a retailer's 'overall operating costs' will be relevant in determining reasonable adjustments while elsewhere, the EM makes clear the costs of procuring electricity do not include retail costs. If this is the case, EnergyAustralia raised concerns the bill would require retailers to reduce retail prices even in circumstances where overall costs of supplying electricity to consumers have increased, for instance, when retail or other costs have increased.
2.54
With regard to its application, EnergyAustralia raised concerns 'reasonable adjustment' would differ depending on the retailer's circumstances. For instance, it is the practice of EnergyAustralia to set retail prices based on wholesale market prices, it is 'indifferent to our ownership structure' (EnergyAustralia is a tier one vertically integrated corporation). EnergyAustralia is of the view the bill, by not applying a single standard to all retailers regardless of circumstances, will create an uneven playing field that will distort competition.
2.55
CS Energy argued the examples in the EM do not accurately reflect how the electricity market operates—principally its use of hedge contracts, which can only be unwound at cost. To the extent a retail portfolio is hedged, the underlying cost of electricity is the contract price under the hedge. Any reduction in the wholesale spot price will not provide an offset in the reduction of the wholesale costs, as suggested by the EM.
Sustained and substantial reductions
2.56
AGL argued the bill establishes a dual standard—sustained and substantial— and this creates significant uncertainty. It stated no guidance is provided in the EM on what constitutes 'sustained' beyond the fact a change lasting a week or a month would not likely be considered sustained. Neither is there clear guidance provided on 'substantial', other than it is relative to the overall cost, though not necessarily large.
2.57
EnergyAustralia and others called for greater clarity as to the meaning of a 'sustained and substantial' reduction in the cost of electricity, questioning whether retailers would have to alter prices throughout the year to reflect the difference in the cost of electricity between summer and winter. Price adjustments once in a twelve month period was considered optimal by submitters.
Underlying cost of procuring electricity
2.58
CS Energy argued a key trigger in a determination of retail pricing is the concept 'underlying cost of procuring electricity', a term that should be defined in the bill rather than the EM. Broadly, the Australian Energy Council argued the underlying cost should be defined as 'market costs' rather than 'procurement costs'.
2.59
Regardless of the definition, AGL suggested there is no certain or 'uncontroversial' approach to calculating underlying costs, particularly for vertically-integrated retailers. It stated:
Any approach will have inherent complexities in the calculation, whether be it focussed on the levelized costs of generation in the NEM, short run marginal costs of particular generators or regions in the NEM or long run costs, taking into account the need to recover very substantial capital investments in generation assets, or on a myriad of other possible formulations of 'cost'. The EM further indicates that the relevant costs are subjective (i.e. specific to any particular retailer), meaning that no objective or consistent standard or proxy can be applied.
2.60
In the absence of a clear definition, EnergyAustralia expressed concern the 'underlying cost of procuring energy' would become synonymous with the cost of generation, which is only part of the cost of providing electricity.
2.61
AGL put to the committee that as a consequence of the complexity, the EM foreshadows detailed examination of each retailer's internal records, including financial and accounting data; 'this makes intrusive and costly ACCC investigation of all retailers inevitable, whether they are in compliance or not'.
Response from the department
2.62
The Department of Environment and Energy, in its submission to the inquiry, recognised wholesale price fluctuations, and indicated the legislation was intended to ensure reductions in wholesale prices that come as a consequence of other government programs will be passed to consumers.
2.63
The department emphasised the construction of the retail prohibition recognises there are many short term fluctuations in the wholesale spot market and prices can differ significantly by the hour, from day-to-day and at different times of the year. It recognises these fluctuations may not be reflective of long-term trends in wholesale or contract prices. As such, the bill will not require retailers to adjust their retail prices following short-term cost changes. This is also made clear at several points in the EM, where it is acknowledged requiring retailers to pass through savings in response to small or short-term price fluctuations would expose consumers to significant price volatility; this is not the intent of the legislation.
2.64
The department stated the current futures prices for 2021 are between $63 and $82 a megawatt hour, considerably lower than current wholesale spot prices:
The Government has targeted an average wholesale price of $70 a megawatt hour by the end of 2021, driven by Government programs such as the Underwriting New Generation Investment program. The existence of the prohibition will ensure that the benefits of wholesale cost reductions will be passed through to customers in the form of lower retail prices.
High bar
2.65
The Consumer Action Law Centre is of the view the prohibited conduct in relation to retail prices sets too high a standard. It suggested instead that prohibited conduct in relation to retail prices should be that retailers have not made 'reasonable price adjustments' subject to various factors, including substantial and/or sustained reductions in underlying costs of energy—so as not to constrain the ability of the regulator to respond.
Unintended consequences
2.66
Submissions suggested there could be several adverse consequences if the legislation is passed in its current form:
retailers will be less likely in future to absorb any input cost increases and this will lead to more frequent retail re-pricing that will expose retail customers to volatility in wholesale electricity costs;
retailers, particularly vertically integrated retailers, will have a disincentive to reduce their own supply costs through efficiency improvements out of a concern any cost reduction might require a corresponding decrease in the retail price;
the legislation will demand more uniformity in retail pricing methodologies and there will be an impact on innovation, particularly products that are based on segmenting customers and tailoring products. Differentiation between retailers will be instead driven by financial strength; and
there will be a distortion of pricing between large and small customers in the retail market with large customers subsidising small customers as retailers make larger than necessary price adjustments for small customers to ensure they do not contravene the law.
Proposed amendments
2.67
The Law Council of Australia and the Australian Energy Council noted section 153E(2) excludes regulated standing offers in New South Wales, South East Queensland, and South Australia, but not Victoria. It is of the view the section should be amended to extend to Victorian regulated standing offers for consistency.
2.68
The Business Council of Australia, argued for amendments built on the DMO regime to the effect the reference for sustained and substantial reductions in the underlying cost of procuring energy (defined as a subset of the costs incurred by retailers), would be an industry-wide benchmark set by the AER, rather than related to the costs incurred by individual retailers. Similar proposals were made by the Energy Council of Australia and AGL.
2.69
AGL proposed the industry benchmark would be the 'costs incurred by a prudent and efficient standalone retailer in managing the risks of supplying customers in the relevant market, followed by a consideration of whether there are specific circumstances applying to the retailer'.
2.70
That an industry-wide benchmark might be set was opposed by the Department of Environment and Energy on the basis it did not take into account the different profiles of corporations in the retail sector, for instance, a large incumbent with significant profit margins and a new entrant with higher costs and a smaller customer base.
2.71
Origin Energy called for a range of clarifications to be made in the bill including that a corporation does not contravene the provisions if:
it has not had reasonable time to make an adjustment;
its own costs have not reduced to reflect reductions elsewhere in the market; and
there has not been a real, sustained or substantive reduction to the overall cost of supplying electricity to small customers.
Contract market
2.72
The bill contains provisions that aim to prevent generators refusing, for anti-competitive reasons, to offer financial contracts. Contracts allow retailers to hedge and control their exposure to variable prices on the spot market. There are a range of penalties that can apply if a corporation is found to have contravened the prohibition, the most commented on which is a contracting order.
2.73
Submitters highlighted a number of concerns with the prohibition itself and its likely operation, including:
there is no requirement for the provisions;
the bill does not recognise the range of legitimate reasons a generator may not offer a contract;
there is significant ambiguity in the provisions; and
the provisions will distort the market.
2.74
Some submitters suggested amendments to the bill to address their specific concerns.
Requirement and potential efficacy
2.75
Submissions questioned the need for market making obligations on several grounds including that the ACCC recommended a market making obligation only in South Australia; and the Australian Energy Market Operator (AEMO) and the Australian Securities Exchange (ASX) are progressing improvements to the transparency of hedge contracting.
2.76
Submitters stated prohibitions in the Competition Act (section 46) against market manipulation for the purpose of reducing competition already apply to the electricity sector. The Business Council of Australia and Ai Group argued the intent to prevent generators using their market position to deliberately reduce competition and liquidity by withholding financial contracts would best be achieved by building on the existing misuse of market power provisions in the Competition Act, and linking those with the penalties in the bill.
2.77
Others suggested there is potential for the retailer reliability obligation (RRO), which has yet to be triggered, to address market liquidity issues. The RRO would require at least two large integrated retailers in each NEM region to offer financial contracts.
2.78
The bill's EM recognises the RRO, which commenced in July 2019, can be imposed on gentailers (generator-retailers) in the event the reliability obligations are triggered. It states 'as businesses adjust for the Retailer Reliability Obligation, contract liquidity… is likely to improve'.
2.79
The Grattan Institute stated there seems to be very little evidence integrated generator-retailers are failing to offer contracts. Further, it suggested the bill is likely to prove ineffective as it will not apply to generator-retailers who do not offer contracts to other retailers because they require their generation capacity to manage their own risk as a retailer. It cited, for instance, ACCC analysis that tier one retailers (AGL, Origin, EnergyAustralia) are short of generation capacity in South Australia. A failure to offer contracts to potential competitors could not be deemed to have occurred for the purpose of substantially lessening competition. The big three would not be affected by the contracting requirements with regard to their South Australia operations, which is where the ACCC identified a lack of contract market liquidity.
2.80
Snowy Hydro claimed the extent to which there has been a loss of market liquidity in electricity derivatives is almost entirely attributable to increased market concentration and consolidation, caused by the privatisation of state-owned generators. Decreasing liquidity could be addressed by lowering the barriers to entry, lowering transaction costs, and improved physical transmission access.
2.81
However, Energy Locals suggested there are cases of contracts being withheld. It stated:
We saw in the run-up to last summer in Victoria a number of contracts were simply not being sold by generators in the market because, when the contract price is double what it would normally be, you don't need to sell very many to hit your business plan and then you can hold the rest back and force the spot market into a pretty ugly place. And we saw that with some forced outages…the way the market is structured doesn't require companies that have significant market power to provide liquidity or to provide these contracts to others in the market.
Contract strategies
2.82
Submitters put to the committee the provisions in the bill are potentially unworkable, and do not adequately acknowledge the range of legitimate factors that could limit a corporation's capacity to offer contracts or the terms upon which a corporation might offer the contracts. As such, the bill has the potential to capture as misconduct, legitimate commercial conduct.
2.83
AGL argued the 'fails to offer' concept is incapable of sensible application in the NEM because generators are in a continuous process of deciding whether to sell or buy contracts and will not be able to determine, in advance, what conduct is lawful. It explained:
Derivative contracts are generally offered quarterly, and annually (both on the basis of financial year and calendar year) in advance of particular 5 minute or half hourly settlement periods in the physical spot market. Generators rarely contract in advance against 100% of their capacity or anticipated sent out energy, for a range of very good commercial reasons.
There may be uncertainty about the availability of fuel, reliability of units may be uncertain, demand is uncertain. Different businesses will have different approaches to managing risk, taking into account shareholder’s [sic] risk appetite, portfolio mix of assets (e.g. fuel type, running profile), and market conditions (e.g. transmission limitations). For vertically integrated generators they must also predict the likely demand of their own customers before determining their capacity to contract with third parties. All these matters are inherently uncertain, highly variable and managed through the application of judgement on a continuous basis.
2.84
Further, AGL stated the prohibition on 'making offers in ways or on terms that prevent, limit or restrict acceptance of those offers' cannot be applied to a competitive contract trading market where both parties are seeking to maximise their respective commercial advantage. It pointed out:
Every time a seller of contracts makes offers on terms that are not consistent with the terms sought by the potential buyer, the seller makes offers on terms that may prevent, limit or restrict acceptance, as the seller has no knowledge of whether the sought after terms are just a negotiating position or are in fact terms that if not satisfied will cause the buyer to not accept the offer.
2.85
Aside from the practical application of the bill's provisions, EnergyAustralia identified a number of reasons a generator may not enter into financial contracts, including the need to go offline for maintenance or safety issues, and individual energy market risk management strategies.
2.86
CS Energy argued an inability to contract on the wholesale market could be a consequence of credit worthiness. Financial contracts are traded on the ASX or through OTC contracts. Retailers seeking to access the ASX need to find an ASX clearing house and satisfy the clearing house of their credit worthiness. Similarly, for OTC trades, the commercial terms that are typically 'unattractive' are credit requirements that small retailers are not always able to meet.
2.87
EnergyAustralia stated corporations must be permitted to consider a counterparty's capacity to pay when deciding whether to offer, and when setting the terms of, an electricity financial contract. It expressed concern the bill, as currently drafted, will require corporations to enter into contracts with counterparties that have a chequered credit history or who may be on the verge of insolvency.
2.88
In response to these concerns, the Department of Environment and Energy stated the purpose test built into the prohibition recognises there are good reasons a gentailer may not be able to enter into contacts with rival retailers. These include if a generator is being mothballed or closes as a result of economic or safety reasons. Failure to offer a financial contract, because of a generator being unavailable for these reasons, would not be considered prohibited behaviour.
2.89
Further, the bill's EM states the contracting limb has a narrow focus that acknowledges there may be broader structural issues affecting contract liquidity that should be addressed outside the bill's legislative framework:
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.
Drafting of the provisions
2.90
The Law Council of Australia reiterated its concerns the definitions of prohibited conduct contain vague and subjective concepts, against which it is difficult for corporations to measure their conduct. For instance, the council cited section 153F(b)(ii) that applies where a corporation offers to enter into electricity financial contracts in a way that has, or on terms that have, the effect or likely effect of preventing, limiting or restricting acceptance of those offers. It is legitimate to ask—acceptance by whom? And, is the condition established if a single offeree does not accept an offer, even if that non-acceptance is unreasonable?
2.91
This point was supported by CS Energy, which suggested the prohibitions could be used by counterparties that are unable to reach contractual agreements on full commercial terms to assert a breach of prohibited conduct provisions.
Recommended amendments
2.92
The Business Council of Australia suggested amendments to section 153F of the bill to include a non-exhaustive list of factors a corporation might use in relation to conduct described in subsection 153F(b). For instance, a corporation would not breach subsection 153F(c) if the corporation engages in conduct to ensure its compliance with its own:
commitments under existing contracts;
risk management strategies;
asset management strategies;
occupational health and safety decisions; and/or
obligations with regard to governance, risk and compliance.
2.93
Alternatively, the Australian Energy Council, noting section 153F is drafted in a manner closely resembling the existing section 46 (misuse of market power) of the Competition Act, recommended section 153F be removed and a contracting order be added to the potential remedies for a breach of section 46 of the Competition Act. It also recommended sections of the EM be incorporated into the bill itself.
2.94
Origin Energy called for a threshold provision to be introduced to section 153F so a corporation must have a substantial degree of market power in a relevant electricity market for the contracting prohibition to be breached. This, according to Origin Energy, would improve alignment between the bill and the Competition Act and ensure the prohibition principally targets cases where conduct has the potential to have an anti-competitive effect.
2.95
Origin Energy also called for a range of additional provisions, including that corporations would not be forced to make contracts if there has been a reduction in available generation because of physical issues arising in relation to generation facilities.
Spot market fixing
2.96
The bill contains a prohibition on generators engaging in conduct that undermines the effective operation of the electricity spot market. Submitters argued there was no requirement for the provisions and that definitions are ambiguous and may capture legitimate market activities. Some submitters made suggested amendments.
Need for new spot marketing fixing provisions
2.97
EnergyAustralia, and others, claimed recent investigations by the AEMC have found no evidence of systemic abuse of market power with regard to the spot market. Further, there are existing prohibitions against this behaviour.
2.98
CS Energy argued the prohibited conduct identified in the bill's EM is already covered by the NER. The new laws will either duplicate or be inconsistent with existing obligations, making the new obligations difficult to interpret and apply. The Business Council of Australia and the Australian Energy Council agreed.
2.99
Submitters suggested preventing generators from bidding in a way that undermines the objectives of the spot market would best be achieved by building on the existing rebidding provisions in the NER (clause 3.8.22A) and linking them with the penalties in the bill. Amended in July 2016, these rules specify a prohibition against making offers, bids or rebids that are 'false or misleading or likely to mislead'; and require generators and market participants wishing to rebid to provide justification for the rebid and to make the rebid as soon as practicable.
2.100
Origin Energy stated that in addition to the NER, that regulates bidding on the spot market, the Australian Consumer Law and the Competition Act, respectively, prohibit misleading or deceptive behaviour and prohibit firms that have substantial market power from engaging in conduct that would substantially lessen competition.
2.101
AGL argued the duplication would result in different standards and norms of conduct being applied to potentially the same conduct. For instance, while the bill refers to 'fraudulently, dishonestly or in bad faith', the National Energy Law includes a prohibition on 'false, misleading or likely to mislead' bidding. The consequence is the ACCC and the AER will have overlapping enforcement responsibilities that will create regulatory uncertainty and potentially different compliance standards.
2.102
However, the Electrical Trades Union of Australia contended the current regulatory environment allows for levels of gaming and profiteering. It stated:
…our current system allows a generator that offers to sell its electricity cheaply to get paid more than it asks for to sell its electricity…We are concerned about the threshold of what misconduct might even look like, considering that the regulatory environment allows what the public would see as unreasonable behaviour but the law says is the way things should operate.
2.103
The Grattan Institute also stated there are examples of bidding behaviour in the spot market that are inconsistent with the best outcomes that would be expected of the market. However, these instances would best be addressed through rules changes or enforcement of the rules already in existence.
Drafting of the provisions
2.104
The Law Council of Australia raised concerns about ambiguity in the provisions, specifically that the difference between base and aggravated cases is unclear; that government policies already distort the market; and that the bill does not define 'distorting or manipulating'.
2.105
The Law Council argued that in economic terms, distorting usually means the conduct has moved prices relative to some perfectly competitive idea. In the council's view, the provision could have the unintended consequence of capturing many bids into the NEM that are placed with strategic objectives in mind.
2.106
This was illustrated by EnergyAustralia:
The NEM is designed to operate in such a way so that AEMO can find the lowest cost way of meeting demand, so the grid can operate securely, from all the bids it receives from all generators. In this way the marginal megawatts needed to be dispatched will set the price in any region. It can be inferred that any bid is therefore influencing price; that is the very design and purpose of the market. Therefore, it will be difficult to differentiate between conduct that simply reflects a decision to make a bid or offer on the basis of forecast supply and demand balance and conduct that distorts or manipulates prices, leading to both enforcement and compliance difficulties in the future.
2.107
Strategically bidding into the market is not in itself anti-competitive and corporations will have different bidding strategies. Meridian Energy stated each retailer has different market exposures, and actions that are reasonable for one set of circumstances may be deemed unreasonable for another. Some corporations might bid their marginal costs, expecting to receive a higher price to cover their fixed costs. Others might bid at high prices in the expectation they will be dispatched infrequently but receive high prices when they are dispatched.
2.108
Snowy Hydro supported this point, and stated the prohibition does not make appropriate allowance for the physical characteristics of different generation types. For instance, different sources of generation, like fuel-constrained hydro-power, require different bidding strategies.
2.109
Given the complexities, CS Energy and AGL raised the issue of distinguishing between legitimate bidding or not bidding (which is central to the design of the electricity market), and prohibited conduct. In particular, a fundamental premise of the NEM is that temporarily high spot prices allow generators to recover sunk costs and signal the need for investment.
2.110
CS Energy noted the EM acknowledges the distinction between taking advantage of higher prices, and behaviour that causes high prices is hard to prove. CS Energy is concerned if the marginal generator sets the price at a politically unacceptable level, it could be considered in breach of the provision.
2.111
The Business Council of Australia agreed that without clarification in the bill itself there is potential for the provisions of the bill to capture ordinary market conduct. This could undermine the policy objectives of the spot market where bids in times of high demand would send price signals to encourage investment in generation. EnergyAustralia also agreed, suggesting the prohibition could limit the ability of generators to bid during periods in a manner that seeks to recover their efficient costs over time and respond to market signals.
2.112
The ACCC, however, suggested it had a good understanding of how the spot market operates:
We are absolutely taking as a given the volatility of the market, and, in enforcing that provision, we will take into account the design of the energy-only spot market, which allows for price volatility, and where high prices are generally a necessary signal for investment. The design of the market is absolutely something that we will take into account if this bill is enacted, in seeking to enforce it.
Proposed amendments
2.113
The Business Council of Australia suggested amendments that would remove references to 'for the purpose of distorting or manipulating prices in that electricity spot market' (153G(b)(ii) and 153H(b)(ii)) and replace these with a requirement that a company acts on a systematic basis, for the sole purpose of creating or maintaining an artificial price that would not be expected to be created or maintained having regard to the design of the relevant electricity market.
2.114
It also proposed amendments, supported by Ai Group, that would align the existing rebidding provisions in the NER with the penalties for spot market fixing.
2.115
Origin Energy sought a provision to the effect if a corporation is engaging in bidding behaviour consistent with the design and the nature of an energy only market, it will not contravene the provision. AGL proposed similar amendments.
Views on responses to prohibited conduct
2.116
A range of concerns were raised with the prohibited conduct remedies, including the appropriateness of notices and recommendations; and the workability and appropriateness of contracting and divestiture orders. In particular, submitters raised questions about the role reserved for the courts in relation to prohibited conduct remedies.
Notices and recommendations
2.117
Under the bill, the ACCC has the ability to issue a range of notices and recommendations concerning all the four types of identified prohibited conduct. Several issues were raised with aspects of these notices.
Threshold of reasonable belief and inferred purpose
2.118
A number of responses the ACCC may make in relation to prohibited conduct, including public warning notices, infringement notices, prohibited conduct notices, and prohibited conduct recommendations (which may result in contracting orders and divestiture notices issued by the Treasurer), require the ACCC to 'reasonably believe' a certain behaviour has occurred.
2.119
Submissions claimed there is no requirement to establish the prohibited conduct has actually occurred. Further, there is a lower threshold in the bill than currently required for an infringement notice under section 51 of the Competition Act, which requires the ACCC to have 'reasonable grounds to believe'. It was suggested to the committee the ACCC (and the Treasurer) should be required to meet a higher threshold, particularly when it is able to infer purpose to establish a breach.
2.120
The Law Council of Australia raised concerns 'reasonable belief' is an unworkable threshold for public warning notices, in relation to their application in retail pricing, financial contracts and spot market misconduct. The Law Council argued the basis upon which the ACCC would be able to form a reasonable belief is unclear, given the imprecise nature of the prohibited conduct provisions. It noted the absence of guiding principles in the bill, stating:
retail pricing—there is no specific guidance in the bill on what constitutes a 'reasonable adjustment', or the basis upon which a reduction in the 'underlying cost of procuring electricity' is to be measured;
financial contracts—the determination of a corporation's subjective purpose is complex and the bill provides no guidance to simplify the assessment; and
electricity spot market—the bill contains no guidance on how the ACCC would form a 'reasonable belief' a corporation's conduct is fraudulent, dishonest, or in bad faith, or for the purpose of distorting or manipulating prices.
2.121
Further, the Law Council is of the view there are limited circumstances in which a public warning notice may be an appropriate remedy. For instance, public warning notices are currently available under the ACL and Part IVB of the Competition Act relating to industry codes. In practice, under the ACL regulations, the notices are a 'compliance tool that may be used to prevent or reduce the opportunity for consumer detriment by alerting consumers to the alleged conduct'. Under these regulations, any decision to issue a public warning notice must balance the likely impact on the relevant corporation against the risk of consumer detriment and the need to act in a timely manner.
2.122
The Law Council suggested in the context of each form of prohibited conduct in the bill, it is highly unlikely a public warning notice could substantially mitigate any risk of consumer detriment. It is also unlikely the balancing consideration would lead to a decision that a public warning notice would be appropriate.
Recommended amendments
2.123
The Australian Energy Council agreed public warning notices are not well suited to dealing with situations where there is no urgent requirement that the public be warned in order that they may avoid harm. It recommended public warning notices be issued by a court. This would, according to the council, reflect the language of section 86D of the Competition Act which empowers the Court, upon application by the ACCC, to make an adverse publicity order in relation to a corporation that has engaged in prohibited conduct.
2.124
Although the Law Council does not support retaining the powers in the bill, it recommended the following amendments:
the thresholds for issuing draft public warning notices, public warning notices, prohibited conduct notices and prohibited conduct recommendations be that the ACCC has 'reasonable grounds to believe' conditions are satisfied;
the substantive provision of section 153L makes it clear the notice issued to the corporation is a draft—this is currently only referred to in the section heading;
the ACCC is required to consider any representations made by the corporation (153L(2)(d)(i)) prior to issuing a public warning notice under section 153M; and
the ACCC is required to provide the corporation with the final public warning notice at least seven days prior to issuing a public warning notice (153M).
2.125
Origin Energy called for the ACCC's decision to issue a public warning notice to be subject to oversight by the Australian Competition Tribunal.
2.126
The Business Council of Australia suggested the threshold should be that the ACCC is 'satisfied' certain conduct has occurred.
Burden of proof
2.127
More generally, submissions expressed concern the bill reverses the traditional onus of proof. Under the bill, a corporation needs to convince the ACCC, in response to a notice, there is no breach, rather than the ACCC needing to prove a contravention in court, on the balance of probabilities.
2.128
This was illustrated by AGL in the context of contract market liquidity:
The prohibition risks an interpretation which places on the generator the burden of establishing a negative proposition—that its purpose in declining to offer a contract or offering a contract on terms the buyer did not find acceptable—was not anticompetitive. This gives the ACCC significant discretion as to the matters and evidentiary standard that would be sufficient to establish the requisite 'belief' of a corporation’s anti-competitive purpose.
Timeframes and opportunities to respond to notices
2.129
Submissions raised concerns there is insufficient time to respond to notices from the ACCC. Further, corporations are not guaranteed notice of the conduct and information being considered by the Treasurer or the recommended remedies.
Draft public warning notice
2.130
The Business Council of Australia argued the 21 days provided in the bill for a corporation to respond to a draft public warning notice is too short. Origin Energy and EnergyAustralia agreed, stating the likely complexity of the allegations make this timeframe unreasonably short.
Prohibited conduct notice
2.131
The Law Council of Australia raised a procedural concern that the statutory timeframe of 45 days for a corporation to respond to a prohibited conduct notice was too short considering the matters raised in such a notice would likely require a corporation to closely examine its commercial operations and gather detailed information in order to respond. The Council recommended the timeframe to respond under section 153P(3) should be increased to 90 days.
Opportunities to respond to notices
2.132
Submitters raised concerns the bill does not specifically require the ACCC to review and respond to the response provided by the company to a draft public warning notice, prior to a public warning notice being issued. This was regarded as particularly important given the lower 'reasonably believes' threshold.
2.133
The Law Council noted the ACCC is not currently required to provide a copy of a prohibited conduct recommendation to the corporation to which it applies. Given the ACCC has the ability to vary or revoke this recommendation, the council is of the view a copy of the recommendation should be provided directly to the corporation. The Australian Energy Council and Origin Energy agreed, with Origin calling for a copy to be provided in cases of the variation of a prohibited conduct recommendation.
Differences permitted between prohibited conduct notices and recommendations
2.134
Under section 153P, a prohibited conduct notice must state the prohibited conduct. The Law Council of Australia raised concerns that under section 153S, the ACCC can provide different recommendations, or identify a different corporation, in a prohibited conduct recommendation to those specified to the corporation in the corresponding prohibited conduct notice. The council is of the view this situation does not allow for procedural fairness as the ACCC may make a recommendation to the Treasurer about which the corporation has had no opportunity to respond. This, for the council, is a particular issue in relation to a recommendation for a divestiture order.
2.135
The Law Council recommended a procedure be implemented to allow the corporation to respond to any matter contained in a prohibited conduct recommendation, not included in the prohibited conduct notice, prior to the prohibited conduct recommendation being provided to the Treasurer. The corporation should be provided 90 days to do so.
2.136
Further, the ACCC should be required to consider any representations made by the corporation prior to giving the Treasurer a prohibited conduct recommendation.
Contracting orders
2.137
Several submissions raised concerns with the potential for contracting orders to distort the market, and noted the limited role provided for courts with regard to contracting orders.
Effect on the market
2.138
Submitters expressed concern allowing the Treasurer to impose a contracting order will distort the market. This was a particular concern because the remedy could be provided where there is no demonstrated risk of market failure or need to regulate monopoly infrastructure.
2.139
The Law Council expressed its concern, stating:
It is implicit in the design of this remedy that the Treasurer will be capable of intervening to adjust contractual rights and obligations between sophisticated market participants in a manner that will lead to a more efficient allocation of resources than would occur through the workings of a competitive market. Typically, market interventions of this kind only occur if there is demonstrated risk of market failure or a requirement to regulate monopoly infrastructure. In these cases, an appropriate economic regulatory regime is typically designed featuring clear principles for establishing proxies for efficient market outcomes and an expert economic regulator, utilised to oversee the application of the chosen regime.
2.140
The council further stated that the powers given to the Treasurer to make a contracting order are unique to the extent they allow direct intervention between counterparties in a competitive market that is subject to ongoing dynamic interaction between market participants. It questioned whether an order could be designed and implemented in real time to adjust contractual terms in a manner that would result in more efficient and better outcomes for consumers.
2.141
This was supported by EnergyAustralia, which questioned the ability of the ACCC to make a 'meaningfully accurate recommendation' about the contracting order within the 45-day process specified in the bill, or that the Treasurer would be able to decide on the order without any further information from the ACCC.
2.142
EnergyAustralia pointed out electricity contracts are financial hedging instruments, not directly linked to the delivery of electricity. If one party is forced to trade at a price that is not fair market value, it will simply result in a transfer of funding from party A to party B with no direct link to customer outcomes.
2.143
AGL expressed concerns a contracting order will reduce efficiency for vertically integrated retailers and risk creating the perception of political influence over a competitive market. Origin Energy stated in the event a gentailer might be served with a contracting order, this could prevent it holding sufficient contracts to manage its own risks.
2.144
The Grattan Institute emphasised the ACCC's cautious approach to implementing market-making obligations. It stated the ACCC's recommendation for a market-making obligation in South Australia was based on a mechanism implemented in the United Kingdom by the Office of Gas and Electricity Markets (Ofgem). In August 2018, following a number of developments in the generation industry, Ofgem announced it was reviewing the effectiveness and necessity for a market-making obligation.
2.145
The Grattan Institute suggested the government was trying to address the same concerns raised by the ACCC, but in a less targeted and likely less effective way. The institute pointed out the ACCC had suggested the existing market liquidity obligation on large vertically integrated retailers in the Energy Security Board's RRO (when triggered), and the market making obligation in South Australia be interoperable.
2.146
The Law Council noted the ACCC has long opposed 'behavioural undertakings' to remedy market power problems because of the difficulty in designing behavioural solutions that are likely to mitigate market power for the benefit of consumers without risk of causing more harm than good.
Role for the courts
2.147
The committee heard opposition to the Treasurer being conferred the power to make contracting orders, and concern about the possible politicisation of executive decisions in the context of alleged but unproven breaches of the law. Many submitters were of the view a contracting order should only be determined by the Federal Court, as is the case for the proposed divestment order.
2.148
AGL contended conferring on the Executive the discretion to impose legal consequences, including the adjustment of private rights and obligations, infringes the separation of judicial power provided for by Chapter III of the Constitution.
2.149
Further, the bill allows the court only to make orders requiring compliance with a contracting order made by the Treasurer. This precludes the court from determining for itself whether the corporation has actually engaged in prohibited conduct. AGL contented:
This effectively usurps the Court’s traditional functions under Chapter III of the Constitution and renders it into little more than a 'rubber stamp' for the decisions made by the Treasurer regarding the existence and extent of prohibited conduct and the appropriate remedies for that conduct.
Proposed amendments
2.150
The Business Council of Australia and Origin Energy argued contracting orders, like divestiture orders, should be made by a court. This was supported by Ai Group, the Australian Energy Council and EnergyAustralia. To mitigate any risk of unintended consequence as a result of a contracting order, the Australian Energy Council recommended the court should also be required to consider evidence from the electricity business about the impact of the Treasurer’s proposed contracting order.
2.151
The Business Council of Australia recommended contracting and divestiture orders should be remedies of 'last resort'. Rather than being 'a proportionate means of preventing such conduct' (as currently provided for in the bill), the orders should be imposed when there is no other available remedy sufficient to prevent the corporation engaging in the prohibited conduct in the future.
2.152
In cases where a contracting order is made, the council suggested amendments that would require the corporation itself to propose to the AER, the terms on which the corporation would enter into electricity market financial contracts. Amendments would require the AER to accept the terms providing certain criteria are met.
2.153
Origin Energy called for the court to have regard to a clear set of criteria when setting prices at which hedge contracts must be offered. This would include the market price of electricity at the time the offers will be required to be made; the corporation's cost of procuring and producing electricity; and ongoing financial viability of the corporation.
2.154
The Australian Energy Council proposed amendments that would prevent a contracting order being made in cases where there is a long-term strategy to permanently close or retire a generation facility, or in cases where a facility requires care or maintenance.
2.155
Although not in favour of the provisions, both EnergyAustralia and the Law Council called for a right of merits review to the Australian Competition Tribunal, as did the Australian Energy Council. AGL stated it was inappropriate for the ACCC, as the investigator, to have the power to make recommendations to the Treasurer, which cannot be tested or adequately defended by the company.
Divestiture orders
2.156
Submitters expressed concern about the appropriateness of divestiture as a remedy; the role reserved for the courts; and the practicalities of divestiture. Several amendments were suggested.
Appropriateness as a remedy
2.157
The Law Council put to the committee the divestiture remedy is not an appropriately targeted remedy for the harm it is seeking to address. It identified a number of circumstances in which a divestiture order would be inappropriate, including where a remedy is:
predicated on contravention of a new, novel and untested legal standard (section 153H);
available for contravention of a behavioural standard without any finding required that the behaviour arises from a market power issue linked to market structure; and
not available more generally under the Competition Act for behavioural contraventions (divestiture is only available under section 50 for cases where there is a substantial lessening of competition, not for misuse of market power under section 46).
2.158
The Department of Environment and Energy emphasised divestiture will only be considered a 'last resort response, reserved for the most egregious breaches, and for which other remedies are not be sufficient to address the conduct'.
2.159
The department further stated divestiture powers are not unique in the global context and that 'the Government is confident, particularly given the international experience, that divesture orders—as a measure of last resort—will not act as a deterrent to investment in Australia'.
Role for the courts
2.160
AGL argued the bill limits the role of the court. It requires the court to determine whether 'the conduct identified in the [Treasurer's] recommendation' is prohibited conduct within the meaning of the statute. It is possible, AGL stated, that this could have the effect of depriving the court of its exclusive function under the Constitution of being the primary finder of fact. The bill will require the court to make an assessment of whether there has been prohibited conduct based solely on the description of the conduct provided by the Treasurer, rather than independently determining what conduct actually occurred and whether it was, in fact, a breach of the law.
Practicalities of forced divestiture
2.161
The Electrical Trades Union put to the committee there is no provision made in the bill for circumstances where there is no genuinely competing authority to which the assets can be divested. Neither, according to the union, is it clear whether workers go with the asset in the case of divestiture.
2.162
EnergyAustralia suggested it would be unlikely a forced sale process, particularly one to be completed within 12 months, would deliver a price for the assets that reflects their true value, particularly as the business will not be able to reject offers it regards as not commercially viable.
2.163
It suggested section 153ZC (acquisition of property) is a 'band-aid attempt to address the constitutional defects of the legislation' that 'may only delay the inevitable constitutional challenge to a later time'.
Proposed amendments
2.164
Origin Energy suggested that in making a divestiture order, the court must consider that the order applied for will result or is likely to result in a significant and material benefit to the public; and if the order applied for will result in a detriment, the benefit would outweigh that detriment.
2.165
It also proposed a defence to non-compliance would be that a corporation can demonstrate a reasonable and genuine attempt to secure a sale of the assets or interests and no entity is willing to acquire them in accordance with the order, 'on terms and conditions, including price, that are acceptable to the corporation, acting reasonably'.
2.166
The Electrical Trades Union called for an amendment to the effect generators who have triggered the three-year notice of closure provisions with the AEMC should be exempt from divestiture.
2.167
The Business Council of Australia proposed:
limiting the definition of 'connected body corporate' so as to ensure assets that are the subject of a divestiture order must be directly involved with the prohibited conduct; and
corporations should be allowed to apply to the court for a variation or revocation of a divestment order if the corporation considers it cannot make the disposable on reasonable commercial terms.
AER information gathering powers
2.168
A number of concerns were raised over the expanded information gathering powers provided to the AER in the bill, and the AER's ability to issue legislative instruments with regard to its functions and powers, which are not subject to disallowance by the Parliament.
2.169
AGL expressed concern the AER's information gathering function was not expressly directed to monitoring compliance with the provisions of the bill. Rather, in combination with its legislative power, the AER would be permitted to regulate retail electricity prices in a manner effectively beyond the oversight of the Federal Court.
2.170
The Australian Energy Council stated the AER's power to obtain information and documents should apply only in respect of the default market offer and be restricted in its use. Origin Energy similarly called for existing confidentiality of the material to be maintained.
2.171
There was also opposition to the ability of the AER to interview individuals. CS Energy suggested trading staff may be compelled to attend formal 'evidence gathering' interviews in respect of conduct that calls for fine technical, financial and operational judgements to be made. Further, it put to the committee the power to compel a person to answer questions in an examination is the kind of power historically reserved for the courts.
2.172
EnergyAustralia opposed the ability of the AER to incorporate into an industry code matters contained in a non-disallowable legislative instrument. This, according to EnergyAustralia, could give the AER 'unfettered power over energy retailers without the appropriate scrutiny of Parliament'. Origin Energy similarly opposed provisions related to the AER's ability to make regulations, including those related to industry codes. AGL opposed the non-disallowable nature of the instruments provided for in the bill.
Effect on the relationship between regulated entities and the regulator
2.173
Snowy Hydro expressed concern that changes to the AER's powers to gather information risked undermining the consultative and constructive nature of engagement between market participants and the regulator. It emphasised the strong, cooperative relationships the AER has developed with regulated entities.
2.174
Snowy Hydo expressed its opinion any information obtained under the AER's new power should be treated consistently with its exiting obligations, and its powers to compel the provision of evidence should be limited to the enforcement of a specific NER rule and not for any other purpose. Snowy Hydro stated:
Market participants have a strong desire to comply with all regulatory requirements and to that end it is essential that they are able to maintain a workable, productive relationship with the regulator.
Phase-in period
2.175
EnergyAustralia and Origin Energy argued for a six-month phase in period, starting from the date the ACCC guidelines are released.
2.176
The Australian Energy Council called for a three-month phase in period from the date the ACCC publishes guidelines on the interpretation of the Act.
Committee view
2.177
The committee is of the view much of the uncertainty around definitions and the operation of the legislation will be resolved when the ACCC releases guidelines that will make its interpretation and enforcement approach clear.
2.178
Many submitters have raised concerns about legitimate reasons entities may have for engaging in conduct that might be construed as prohibited under the bill. For instance, the committee notes concerns about issues that might prevent retailers obtaining hedging contracts, and that there is a range of strategies generators may use to bid into the wholesale market.
2.179
The committee is confident these issues were identified by the ACCC in its report into retail pricing and the ACCC will be cognisant of this complexity when drafting its guidelines.
2.180
The committee notes the legislation will commence six months after Royal Assent, which will be sufficient time for corporations to understand the ACCC guidelines and make adjustments to their business practices if required.
2.181
The committee recommends that the bill be passed.
Senator Slade Brockman
Chair