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2019
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
TREASURY LAWS AMENDMENT (PROHIBITING ENERGY MARKET
MISCONDUCT) BILL 2019
REVISED EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Josh Frydenberg MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE
HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED
Table of contents
Glossary................................................................................................. 1
General outline and financial impact ...................................................... 3
Chapter 1 Overview ...................................................................... 5
Chapter 2 Prohibited conduct ..................................................... 11
Chapter 3 ACCC responses ....................................................... 37
Chapter 4 Treasurer's contracting orders ................................... 43
Chapter 5 Court ordered divestiture ........................................... 53
Chapter 6 Prohibited conduct notices and
recommendations ...................................................... 63
Chapter 7 AER information gathering ......................................... 75
Chapter 8 Regulation impact statement ..................................... 81
Chapter 9 Statement of Compatibility with Human Rights ........ 111
Glossary
The following abbreviations and acronyms are used throughout this
Explanatory Memorandum.
Abbreviation Definition
ACCC Australian Competition and Consumer
Commission
AEMO Australian Energy Market Operator
AER Australian Energy Regulator
ASIC Australian Securities and Investments
Commission
Bill Treasury Laws Amendment (Prohibiting
Energy Market Misconduct) Bill 2019
CCA Competition and Consumer Act 2010
CSIRO Commonwealth Scientific and Industrial
Research Organisation
National Electricity Law The National Electricity Law set out in the
Schedule to the National Electricity (South
Australia) Act 1996 of South Australia, as
applied in the laws of other states, the
territories, and the Commonwealth.
National energy laws The National Electricity Law, the National
Gas Law and the National Energy Retail
Laws
NEM National Electricity Market
1
General outline and financial impact
Schedule 1 - Prohibited conduct in the electricity industry
Schedule 1 to the Bill implements a comprehensive legislative framework
consisting of new prohibitions and remedies tailored to conduct in
electricity markets.
Date of effect: The day of 6 months after the Bill receives the Royal
Assent.
Proposal announced: This measure was announced by the Government
on 20 August 2018.
Financial impact: This Schedule has no financial impact.
Human rights implications: The Bill engages human rights. See
Statement of Compatibility with Human Rights -- Chapter 9.
Compliance cost impact: Low.
Summary of regulation impact statement
Regulation impact on business
Impact: An average increase of $0.79 million per year for businesses, a
low compliance cost impact.
Main points:
• Schedule 1 to the Bill is expected to involve three sources of
additional compliance costs for businesses operating in
electricity retail, contract and wholesale markets.
• Firstly, under the Electricity Price Monitoring Inquiry, the
ACCC is expected to issue information-gathering notices.
Electricity businesses will incur costs in complying with such
notices.
• Secondly, electricity retailers and generators are expected to
incur additional legal costs following the commencement of
the legislation, seeking advice to learn about the new regime
and ensure their business practices are compliant.
• Finally, where the ACCC identifies potential prohibited
conduct through its Electricity Price Monitoring Inquiry, the
ACCC may issue information-gathering notices to investigate
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
the conduct. Recipients of such notices will incur costs in
complying with the notices.
• It is expected that these costs will primarily relate to
transitional issues, which will be mitigated through a
six-month delay in the commencement of Schedule 1 to the
Bill.
Schedule 2 - AER information gathering
Schedule 2 to the Bill provides the AER with the necessary powers
required for its functions to set a default market offer and reference bill,
including information gathering powers, making necessary legislative
instruments, and information sharing with government agencies.
Date of effect: The day the Bill receives the Royal Assent.
Proposal announced: This measure was announced by the Government
on 20 August 2018.
Financial impact: Nil.
Human rights implications: The Bill engages human rights. See
Statement of Compatibility with Human Rights -- Chapter 9.
Compliance cost impact: Low.
Summary of regulation impact statement
Regulation impact on business
Impact: The measures in Schedule 2 to the Bill involve limited
compliance costs in terms of information gathering powers, as these new
powers are broadly consistent with information gathering powers ascribed
to the AER under the National Electricity Laws.
Main points:
• As these information gathering powers are broadly consistent
with those powers already available to the ACCC as a part of
its ongoing monitoring function of the NEM, it is anticipated
that these additional information gathering powers would not
require energy businesses to share information beyond what
is already being collected and provided to the ACCC.
4
Chapter 1
Overview
Outline of chapter
1.1 This chapter sets out the context and background to the Bill.
The Bill implements part of the Government's policies to ensure
well-functioning electricity markets that deliver benefits for consumers
and small businesses.
Context of amendments
1.2 On 20 August 2018 the Government announced a package of
measures in relation to the electricity sector.
1.3 The Government's announcement followed the Final Report of
the ACCC's Retail Electricity Pricing Inquiry, which was released on
11 July 2018. The Final Report was the culmination of a 15 month
investigation into the supply of retail electricity and the competitiveness
of retail electricity prices.
1.4 The Government is progressing a number of the ACCC's
recommendations, and has tasked the ACCC with undertaking an ongoing
Electricity Price Monitoring Inquiry across the National Electricity
Market between 2018 and 2025.
1.5 The remedies contained in the Bill will support the ACCC's
inquiry, by allowing the ACCC to respond to misconduct identified as part
of its price monitoring inquiry.
1.6 The remedies and other measures in the Bill only apply to the
electricity sector, and complement the existing provisions of the CCA and
the National Electricity Law.
Summary of new law
1.7 Schedule 1 to the Bill sets out three kinds of prohibited conduct.
These are:
• prohibited conduct in relation to retail prices;
• prohibited conduct in relation to the electricity financial
contract market; and
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• prohibited conduct in relation to the wholesale electricity
market.
1.8 If the ACCC reasonably believes that a person has engaged in
prohibited conduct, the legislation makes available a graduated range of
remedies that can apply.
1.9 The ACCC may:
• issue a public warning notice;
• issue an infringement notice;
• accept a court-enforceable undertaking;
• apply to a court for an injunction;
• apply to a court for a pecuniary penalty.
1.10 In the event that the ACCC reasonably believes that a person has
engaged in certain prohibited conduct in relation to the electricity
financial contract market or the wholesale electricity market, the ACCC
may recommend that the Treasurer make an order with contracting
obligations that would require an electricity company to offer electricity
financial contracts to third parties.
1.11 If the ACCC reasonably believes that a person has engaged in
certain prohibited conduct in relation to the wholesale electricity market,
then the ACCC may recommend that the Treasurer make an application to
the Federal Court seeking an order directing the person to divest specified
assets.
1.12 It is intended that the making of a contracting order by the
Treasurer, or an application to the Federal Court by the Treasurer, would
only occur in respect of more serious contraventions, where such an action
is proportional and targeted to the conduct.
1.13 The provisions in the Bill apply nationwide, including to areas
that are not connected to the NEM.
1.14 As the ACCC's Electricity Price Monitoring Inquiry will end on
31 August 2025, the measures contained in Schedule 1 to the Bill also end
in 2025.
1.15 Schedule 2 to the Bill confers new compulsory information
gathering powers on the AER, allows the AER to share information with
other agencies and facilitates the conferral on the AER of functions
related to the regulation of retail electricity prices.
6
Overview
Application and commencement provisions
1.16 Schedule 1 commences 6 months after the Bill receives the
Royal Assent, and Schedule 2 commences on the day the Bill receives the
Royal Assent.
1.17 The provisions in Schedule 1 to the Bill apply between the Bill's
commencement and 31 December 2025. This ensures that the provisions
in Schedule 1 run until the ACCC's Electricity Price Monitoring Inquiry
has concluded. [Schedule 1, item 1, section 153B]
1.18 The amendments in Parts 1 and 2 to Schedule 1, which set out
the provisions relating to prohibited conduct and the ACCC and Treasurer
responses, apply in relation to prohibited conduct that is engaged in on
and after the commencement of those provisions, or to conduct that
continues to be engaged in on and after commencement. The provisions
do not apply to prohibited conduct that is conducted before the date that
Schedule 1 commences. [Schedule 1, item 14]
Review of amendments
1.19 Amendments made by the House of Representatives provides
that before the end of four years after the day in which Schedule 1 to the
Bill commences, the Treasurer must establish a review of the
effectiveness of the amendments in Parts 1 and 2 to Schedule 1, which set
out the provisions relating to prohibited conduct and the ACCC and
Treasurer responses and remedies. The review must include the following:
• impacts on electricity market performance, including market
efficiency, equity, reliability, affordability, emission
reduction and investment outcomes; and
• any other factors relevant for an assessment of the
effectiveness of the amendments on the Australian electricity
sector and economy.
[Schedule 1, item 15]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Comparison of key features of new law and current law
New law Current law
Prohibited conduct
A corporation cannot engage in No equivalent.
prohibited conduct in relation to:
• retail pricing of electricity;
• the electricity financial
contract market; and
• the wholesale electricity
market.
Public warning notices
The ACCC may issue a public No equivalent.
warning notice to a corporation that it
reasonably believes has engaged in,
or is engaging in, prohibited conduct,
after giving the corporation 21 days
to respond to a draft notice. The
ACCC must reasonably believe that
the corporation has engaged in, or is
engaging in, prohibited conduct, the
prohibited conduct has or will result
in detriment to one or more persons
and that it is in the public interest to
issue the notice.
Infringement notices
The ACCC may issue an No equivalent.
infringement notice if it reasonably
believes that a corporation has
contravened the prohibited conduct
provisions.
The penalty amount for a corporation
is 600 penalty units.
Injunctions
The ACCC may apply to a court for No equivalent.
an injunction to stop a corporation
from engaging in prohibited conduct,
or to otherwise direct them.
Pecuniary penalties
The ACCC may apply to a court for No equivalent.
an order that a corporation has
engaged in prohibited conduct, and
8
Overview
New law Current law
for a pecuniary penalty for engaging
in the prohibited conduct.
The maximum penalty amount that
the court can order is the greatest of:
• $10,000,000;
• three times the value of the
total benefit attributable to
the conduct;
• 10 per cent of the annual
turnover of the corporation
in the 12 months before the
conduct occurred.
Treasurer responses
Following the receipt of a prohibited No equivalent.
conduct recommendation from the
ACCC that relates to certain
wholesale or financial contract
market prohibited conduct, the
Treasurer can issue a written order to
the corporation or body corporate
identified in that recommendation and
order them to make offers to enter
into electricity financial contracts
with third party entities.
Following the receipt of a prohibited
conduct recommendation from the
ACCC that relates to certain
wholesale market prohibited conduct,
the Treasurer may apply to the
Federal Court for an order directing a
corporation or body corporate
identified in that recommendation to
dispose of their interests in securities
or assets that are part of their
electricity business.
Notice and recommendation requirements
The ACCC can: No equivalent.
• give a prohibited conduct
notice to the corporation
that it reasonably believes
has engaged or is engaging
in prohibited conduct;
• give a prohibited conduct
recommendation to the
Treasurer including the
reasons why the ACCC
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
New law Current law
believes the corporation has
engaged in prohibited
conduct and a
recommendation for the
Treasurer to take further
action in relation to the
prohibited conduct; and
• give a no Treasurer action
notice to the Treasurer if the
ACCC considers that a
prohibited conduct
recommendation is not
appropriate.
The ACCC may vary or revoke a No equivalent.
prohibited conduct notice, prohibited
conduct recommendation, or no
Treasurer action notice.
AER information gathering
AER may require a person to produce No equivalent.
a document or provide written or oral
evidence if it requires the document
or evidence for the performance of its
Commonwealth functions.
AER may also disclose information AER may disclose information to
to an agency if satisfied that the specified or prescribed bodies.
information will enable or assist the
agency to perform or exercise its
functions or powers.
Regulations conferring No equivalent.
Commonwealth functions on the
AER may empower the AER to make
disallowable or non-disallowable
legislative instruments.
Regulations prescribing an industry No equivalent.
code for electricity retailers may
apply, adopt or incorporate any
matter contained in an instrument
(including a non-disallowable
legislative instrument made by the
AER) as in force or existing from
time to time.
10
Chapter 2
Prohibited conduct
Outline of chapter
2.1 This Chapter explains the provisions in the Bill that define
prohibited conduct in electricity retail, contract and wholesale markets.
Context of amendments
2.2 The provisions of the Bill are aimed at potential conduct (called
'prohibited conduct') in retail electricity, contract and wholesale markets
which can be harmful to competition or lead to poor outcomes for
electricity consumers.
2.3 Division 2 of new Part XICA of the CCA defines the prohibited
conduct that the Bill seeks to prevent. The prohibited conduct broadly
relates to the possibility of taking advantage of small consumers,
anti-competitive contracting behaviour, and conduct which undermines
the effective operation of the wholesale market.
Summary of new law
2.4 The Bill creates three new electricity sector-specific prohibitions
on certain conduct in electricity markets. The prohibitions relate to retail
pricing, financial contract market liquidity and conduct in wholesale spot
markets.
Detailed explanation of new law
2.5 A corporation (together with one or more of its related body
corporates) might engage in conduct in electricity retail, contract or
wholesale markets that has the purpose or result of undermining effective
competition in those markets or leading to poor outcomes for consumers.
The Bill creates three prohibitions on conduct that, if engaged in by
certain participants in electricity markets, can be detrimental to
competition or to consumer welfare. [Schedule 1, item 1, section 153C, definition
of 'prohibited conduct']
2.6 The Bill is concerned with preventing certain conduct in the
following parts of the electricity supply chain:
11
Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• The wholesale market, whereby electricity generators
produce electricity that is supplied into the electricity grid
and distributed to customers. This can be done through a spot
market, such as that which exists for the NEM.
• The financial (or hedging) contract market, whereby
electricity generators, electricity retailers and some end users
enter into derivative contract arrangements to manage price
risk arising in the wholesale market. Other entities, such as
financial intermediaries and speculators, may also engage in
this market.
• The retail market, whereby electricity is supplied to most
end users of electricity (such as residential and small
business consumers) through retail contracts.
2.7 The Bill does not create prohibitions on conduct by electricity
network businesses (transmission and distribution businesses).
2.8 For the purposes of the Bill, 'generate' and related terms, such
as 'generator' and 'generation asset' should be interpreted broadly as
related to any form of capacity capable of being bid into the wholesale
spot market and includes, among other things, an asset that can store and
dispatch electricity. The term is to be afforded a technology-neutral
meaning, to apply to new forms of capacity as they are developed.
'Generate' is to be interpreted in line with the general understanding of
the term as applied by market bodies (such as regulators) and market
participants.
What kind of entities cannot engage in prohibited conduct?
2.9 The prohibitions in the Bill on engaging in certain categories of
conduct apply to 'corporations'. The term corporation is already defined
in subsection 4(1) of the CCA to be a body corporate that:
• is a foreign corporation;
• is a trading corporation formed within the limits of Australia;
• is a financial corporation formed within the limits of
Australia;
• is incorporated in a Territory; or
• is a holding company of a body corporate covered by the
above points.
2.10 This definition covers those body corporates in relation to which
the Commonwealth Parliament can legislate (see sections 51(xx) and 122
of the Constitution) and binds the Crown in right of the States and
Territories. [Schedule 1, item 2, paragraph 2B(1)(ba)]
12
Prohibited conduct
2.11 A corporation here includes a corporation acting in the capacity
of a trustee.
2.12 Paragraphs 2.106 to 2.119 detail rules on the application of
Part XICA to corporate group structures.
2.13 The prohibited conduct provisions apply to conduct engaged in
outside Australia where the body corporate is incorporated or carrying on
a business in Australia. [Schedule 1, items 3 and 4, paragraphs 5(1)(ba) and (f)]
Prohibited conduct in the retail electricity market
2.14 The first category of prohibited conduct created by the Bill
relates to the retail market. [Schedule 1, item 1, section 153E]
2.15 Over time various factors, such as increased electricity
generation capacity or more effective competition, could result in
sustained decreases in supply chain costs for retailers. This prohibition is
designed to ensure consumers see the benefit of supply chain cost savings,
and that such savings are not retained by retailers to the detriment of their
consumers.
2.16 The Treasurer may not make a contracting order, or apply to the
court for a divesture order, in relation to a breach of the retail pricing
prohibition. The available remedies are detailed in Chapter 3.
What is prohibited conduct relating to retail pricing?
2.17 The Bill provides that a corporation engages in prohibited
conduct if it:
• offers to supply, or actually supplies, electricity to 'small
customers' [Schedule 1, item 1, paragraph 153E(1)(a)]; and
• fails to make reasonable adjustments to the price of those
offers or supplies to reflect reductions in its underlying cost
of procuring that electricity [Schedule 1, item 1,
paragraph 153E(1)(b)].
2.18 Paragraph 153E(1)(a) provides that the retail pricing prohibition
applies to electricity retailers that sell, or offer to sell, electricity to 'small
customers' (residential or small business consumers).
2.19 Paragraph 153E(1)(b) is the operative rule aimed at ensuring that
reductions in supply chain costs for the particular retailer in question are
passed on to the retailer's residential and small business customers.
2.20 The prohibition only applies to market offers for electricity (that
is, retail offers which are on terms set by retailers). The prohibition does
not require retailers to adjust their standing offer prices (that is, retail
offers which retailers are required by law to provide).
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.21 For example, in the event of a sustained and substantial
reduction in underlying costs, a retailer will not be required to adjust the
prices of its default market offers made under the Competition and
Consumer (Industry Code - Electricity Retail) Regulations 2019.
2.22 Subsection 153E(2) provides that a retailer does not contravene
section 153E where it fails to adjust its standing offer prices. [Schedule 1,
item 1, subsection 153E(2)].
2.23 The prohibition does not deal with overall increases in supply
chain costs.
What is a supply of electricity?
2.24 The existing definition of supply in subsection 4(1) of the CCA
applies for the purposes of the new rules in the Bill. A retailer supplies
electricity to a small customer if it sells electricity to those customers as
final purchasers, for consumption at those small customers' residences or
small business premises.
What is a small customer?
2.25 A small customer is either a residential customer or a small
business customer. [Schedule 1, item 1, section 153C, definition of 'small customer']
2.26 A residential customer is a person who purchases, or proposes
to purchase, electricity for personal, household or domestic use at their
premises. [Schedule 1, item 1, section 153C, definition of 'residential customer']
2.27 A small business customer is a person who is not a residential
customer and who purchases, or proposes to purchase, less than 100
megawatt hours of electricity annually. Where a business operates across
one or more premises, the business will be a 'small business customer' for
the purposes of the Bill if the business purchases, or proposes to purchase,
less than 100 megawatt hours of electricity in a financial year when the
premises are combined. [Schedule 1, item 1, section 153C, definition of 'small
business customer']
What is the underlying cost of procuring electricity?
2.28 A retailer's 'underlying cost of procuring electricity', referred to
in paragraph 153E(1)(b), means the net cost to the retailer of getting
electricity to their small customers.
2.29 The components of retailer's costs of procuring electricity (their
'cost stack'), which make up the amounts retailers charge to their
consumers, are as follows:
• Wholesale costs: Includes the retailer's wholesale costs of:
acquiring electricity from the spot market (or other form of
market, where there is no relevant spot market); the costs of
contracting to manage exposure to wholesale spot price
14
Prohibited conduct
volatility; or direct contracting within an entity in the case of
a gentailer (vertically integrated businesses operating as both
a generator and retailer).
• Network costs: The costs charged by transmission and
distribution network operators for the transmission of
electricity.
• Environmental costs: The costs of complying with
environmental schemes.
2.30 Other relevant concepts, which are not considered costs of
'procuring electricity', are as follows:
• Retail costs: The costs of running a retail business, such as
billing, marketing and consumer assistance costs.
• Retail margins: A measure of a retailer's profitability, often
measured in terms of earnings before interest, tax,
depreciation and amortisation or earnings before interest and
tax.
2.31 In the case of gentailers, determining the costs of procuring
electricity will involve a holistic analysis of the costs of each arm of the
business, as an analysis of only one arm of the business may not provide a
clear picture. The analysis may include opportunity costs, rather than
actual costs, where appropriate. For example, where the generation and
retail arms of a gentailer enter into an electricity financial contract, the
relevant cost to be considered will be the opportunity cost (that is, the cost
that would be expected if the transaction was at arms' length between
unrelated entities). Depending on the approach to internal transactions of a
gentailer, the opportunity cost and actual cost in this example may be
similar or the same.
2.32 The test in paragraph 153E(1)(b), of sustained and substantial
reductions in the cost of procuring electricity, is aimed at the effect that
reductions in the overall cost stack have on the ultimate prices charged to
a retailer's small customers. As discussed below, an analysis of the 'costs
of procuring electricity' must take into account the overall cost stack,
including the relative increases or decreases in elements of the cost stack.
2.33 Paragraph 153E(1)(b) refers to the 'underlying' cost of
procuring electricity to make clear that that cost may not always manifest
itself as a direct cost of electricity to the retailer. There may be cases
where that cost is reflected in expenses that the retailer pays to
intermediaries or interposed entities. Those payments may not nominally
be a cost for electricity for on-supply to customers but may have such a
cost embedded in them or may relate to acquiring electricity for that
purpose. An example would be amounts paid to a broker in relation to
financial contracts hedging the cost of electricity on a spot market.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
What are 'reasonable adjustments' to prices?
2.34 The crux of the test for the retail pricing category of prohibited
conduct is whether a particular retailer has made 'reasonable adjustments'
to the prices it charges small customers to reflect reductions in its
underlying cost of procuring electricity. In making that assessment, it will
be necessary to have regard to all the relevant facts and circumstances in
relation to that particular retailer. This assessment should recognise that
while the overall intention is that consumers should see the benefit of
lower prices, there can be costs to adjusting pricing, both for consumers
(who need to understand and adjust to changes) and for retailers (to
implement changes).
2.35 The assessment of whether a corporation has contravened
section 153E primarily depends on the following factors:
• whether any reductions in supply chain costs are sustained
and substantial, with reference to broad, market-wide price
trends;
• whether, when and how adjusting prices in response to a
relevant reduction would be 'reasonable', taking into account
the particular circumstances of the retailer in question
(including that retailer's overall operating costs).
Sustained and substantial reductions in supply chain costs
2.36 The test in paragraph 153E(1)(b) is concerned with reductions in
underlying costs which are both sustained and substantial. While some
consumers actively choose plans which allow for a degree of regular price
moderation (such as time of use tariffs), excessively frequent price
changes can be detrimental to consumers. Assessments of whether a
sustained and substantial reduction in underlying costs has occurred
should consider both broad electricity market trends and the specifics of
the case.
2.37 It is not intended that retailers be required to adjust their retail
prices in response to short term fluctuations in supply chain costs, such as
those that reflect normal variations in spot market prices. A change in
underlying costs that lasted a week or a month would be unlikely to be
considered sustained. However, where it becomes apparent over time that
there has been a downward trend in supply chain costs, this would be
considered sustained.
Example 2.1
In the middle of summer, temperatures unexpectedly drop well below
average for that time of year. As a result, the demand for electricity
also falls, and wholesale spot prices significantly reduce. However, the
next week, temperatures, demand and spot prices return to average
levels that would be expected during summer. While there may have
16
Prohibited conduct
been a substantial reduction in wholesale prices, the reduction was not
sustained, and retailers do not need to adjust their prices to reflect this
short-term reduction.
2.38 It is also not intended that retailers adjust their retail prices in
response to small moderations in their supply chain costs, as this would
place an unreasonable burden on retailers with little benefit flowing to
consumers. To be substantial, the reduction in costs must be real or of
substance, relative to the overall costs of procuring electricity, though not
necessarily large.
Example 2.2
Wholesale spot prices fall by 20 per cent, and this is also reflected in a
retailer's costs of over-the-counter and derivative contracts. This would
be likely to reflect a substantial reduction in the retailer's underlying
costs of procuring electricity. If the reduction is sustained, the retailer
will then need to consider their need to make a reasonable adjustment
to their retail prices in the retailer's specific circumstances.
When prices need to be adjusted
2.39 Once a sustained and substantial reduction in supply chain costs
has occurred, a retailer will need to consider its need to make a reasonable
adjustment to the prices it charges its small customers. This adjustment
must be made within a period of time which is reasonable in the
circumstances. A retailer will not contravene the prohibition if it has not
had a reasonable amount of time to make an adjustment, or if it has made
an adjustment which is reasonable in the circumstances.
2.40 It is not intended that retailers are required to make many
changes to retail prices throughout a year. Consumers are typically billed
on a quarterly basis, and retailers often adjust their retail prices on an
annual basis. It would not be reasonable, for example, for a retailer to fail
to take into account a sustained and substantial reduction in its supply
chain costs the next time it changes its retail prices. Depending on the
timing of the reduction in costs relative to the retailer's next planned price
adjustment, it may be reasonable to make an adjustment in advance of that
planned adjustment.
Example 2.3
A retailer experiences a sustained and substantial reduction in its
supply chain costs. This reduction becomes clear a month before the
retailer's next annual price update. When making its annual price
update, the retailer makes an adjustment to reflect the reduction in
supply chain costs. In the circumstances, the retailer has made its
adjustment at a reasonable time following the reduction in supply chain
costs.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.41 Other applicable legislation may place requirements on retailers
in relation to when and how they may adjust their retail prices (for
example, notifying consumers ahead of any adjustment to prices).
Subsection 153E(3) makes clear that that retailers are not be required to
make an adjustment where this would contravene another law. [Schedule 1,
item 1, subsection 153E(3)]
Need to take account of the particular circumstances of the retailer
2.42 The test for prohibited conduct relating to retail pricing
acknowledges that different adjustments may be considered reasonable
depending on the particular circumstances of the retailer.
2.43 For example, retailers offer a wide range of retail products,
which vary in their terms. Some retail offers have a single tariff (a charge
expressed in cents per kilowatt hour), while others have peak and off-peak
tariffs (where the tariff increases during peak times and decreases during
off-peak times). Offers may have other features, such as providing green
power, or a solar feed-in tariff. Noting these substantial differences, it may
be reasonable for two different offers to be adjusted in different ways.
This ensures the legislation can adapt to innovation in retail offerings.
Example 2.4
Due to the entry of new generation into the system, there has been a
substantial and sustained reduction in wholesale spot costs at peak
times. Wholesale spot costs at non-peak times have not changed
significantly.
Retailer A offers only single-rate tariffs which charge a single price
during both peak and off-peak times. Retailer A adjusts its overall
tariff to reflect the reduction in wholesale costs.
Retailer B offers a range of retail products, including an offer with a
time of use tariff, which charges a higher price during peak times and a
lower price during off-peak times. Retailer B adjusts the peak
component of its tariff to reflect the reduction in wholesale costs, but
does not adjust the off-peak component of its tariff.
Both Retailer A and Retailer B have made reasonable adjustments to
their prices, despite making different adjustments to retail offers with
different structures.
2.44 In undertaking an assessment of reasonable adjustments, the
retailer's overall operating costs will be relevant. This can include the
costs across a business which may operate in multiple States and
Territories or nationally.
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Prohibited conduct
Example 2.5
A retailer has a large number of very loyal customers, many of which
have been on the same expensive market offer for years and have not
taken advantage of the retailer's better offers. The retailer experiences
a sustained and substantial reduction in supply chain costs. The retailer
knows many of its customers are not sensitive to changes in prices, and
are unlikely to leave for another retailer. The retailer chooses not to
pass through any of its supply chain cost reductions in its offers to the
loyal customers. In the circumstances, the retailer is likely to have
contravened section 153E, as it has failed to make a reasonable
adjustment to its prices.
2.45 In analysing the circumstances of the retailer, both the retailer's
current costs and their costs over the longer term will be relevant. For
example, retailers' risk management strategies or pricing strategies may
be set several years in advance and locked in over that period. In such
circumstances, it may not be reasonable to require an adjustment to be
made. It is intended that the requirement to pass through savings does not
undermine a retailer's viability or risk management strategies.
Example 2.6
Due to a recent network determination, there is a sustained and
substantial reduction in network costs in a particular network region.
Retailer A is a highly profitable incumbent retailer in the region. All
else held constant, it would be reasonable for Retailer A to pass
through the full reduction in network costs.
Retailer B has recently entered the market, and has been operating at a
loss so that it can compete on price with Retailer A and establish a
customer base. Retailer B's strategy is to gradually unwind its pricing
structure so that it is profitable in the medium term. Retailer B only
partially passes through the price reduction. Retailer B may have made
a reasonable adjustment in the circumstances, despite making a smaller
price reduction than Retailer A.
Example 2.7
There has been a substantial and sustained reduction in wholesale spot
prices, and a retailer needs to make reasonable adjustments to its retail
prices.
The retailer had earlier entered into a number of contracts at a higher
point in contract prices, and these contracts continue to run. While the
retailer is paying lower wholesale spot prices, it is committed to higher
contracting costs, which partially offsets the reduction in wholesale
costs. All else held constant, it would be reasonable for the retailer to
adjust it prices to reflect the balance of the reduction in wholesale costs
and the lack of reduction in contracting costs, as it will be making a
reasonable adjustment to the extent its overall supply chain costs have
reduced.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Example 2.8
A retailer negotiates particularly advantageous electricity financial
contracts during a temporary low point in the market. Prices in the spot
market return to normal soon after the retailer enters the contracts. It
may be reasonable for the retailer to not adjust its retail prices given
there is not a substantial and sustained reduction in broader market-
wide prices.
Example 2.9
Over a three year period, wholesale prices trend upward for the first
two years, and begin to fall in the third year to the point where there
has been a sustained and substantial reduction.
In the first two years, a retailer does not increase its prices and absorbs
the higher prices which would otherwise flow through to its
consumers. All else held constant, when considering the retailer's
pricing over the longer term, it may be considered reasonable for that
retailer to make only small adjustment, or no adjustment, to its prices
in the third year.
2.46 Where a retailer is able to lower its operating costs, for example
by improving its internal processes and becoming more productive,
retailers would typically use the resulting savings in the short run to
achieve a combination of becoming more price-competitive and benefiting
their retail margin. The legislation does not require a retailer to adjust its
prices to pass through such efficiency gains, as the legislation is primarily
concerned with broad, market-wide price trends. The ability to benefit
from efficiency gains is the retailer's financial incentive to identify
improvements. Retailers which identify efficiency gains will remain free
to determine whether, and by how much, to reduce their prices to reflect
their improved productivity. Over time, it is expected that other retailers
would seek to identify similar efficiency gains in order to remain
competitive, eventually bringing the market prices offered by all retailers
down.
Example 2.10
A retailer designs an innovative new computer system, which halves
the administration work required to process its customer accounts and
billing.
Section 153E does not require the retailer to reduce its prices, as there
has not been a reduction in the retailer's costs of procuring electricity.
However, due to competitive pressure in the market, the retailer
nevertheless reduces its prices by a portion of the savings while also
retaining a portion as a return on the investment. Over time, other
retailers adopt the same system and prices fall as they compete to
retain their market share. The retailer has not breached section 153E.
2.47 Further, a reduction in one element of supply chain costs (such
as wholesale prices) may be offset by an increase in another element of
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Prohibited conduct
supply chain costs (such as network prices), such that the retailer's costs
of procuring electricity have not reduced. Similarly, a reduction in a
retailer's costs of procuring electricity may be offset by an increase in its
other operating costs (such as marketing costs). However, it would not be
open for a retailer to claim that it has reasonably adjusted its prices (or
reasonably failed to adjust its prices) where the relevant costs are
artificially inflated.
Example 2.11
There has been a sustained and substantial reduction in market-wide
wholesale spot prices. A gentailer realises it may need to make a
reasonable adjustment to its prices to reflect this reduction, and seeks
to avoid this. The gentailer does not adjust its retail prices, but instead
uses accounting methods to shift its profits to its generation arm, such
that the retail arm appears to be paying a much higher spot price than
it actually is. In these circumstances, the gentailer has failed to make a
reasonable adjustment to its retail prices, as its wholesale costs of
procuring electricity have been artificially inflated.
Prohibited conduct in the electricity financial contract market
2.48 The second category of prohibited conduct created by the Bill
relates to the electricity financial contract market. It is aimed at ensuring
that generators, including gentailers, do not refuse to offer financial
contracts for anti-competitive purposes. [Schedule 1, item 1, section 153F]
2.49 For an electricity retailer to be able to compete in the retail
market, they need to be able to effectively manage the risk of price
volatility in the wholesale market. The availability of financial contracts
with counterparties is critical to managing that risk. Those counterparties
will usually be electricity generators or those that can enter into financial
contracts with such generators.
2.50 In essence, electricity financial contracts allow parties to fix a
price for electricity at a particular amount, or within a particular price
band. In that way they give generators and retailers certainty about the
future price of electricity. Creating certainty in this cost structure is
important to allowing retailers to compete in the retail electricity market.
2.51 A gentailer may be well-placed to ensure that its price risk is
adequately managed. However, a retailer that does not have a generation
arm relies on a liquid financial contract market for the availability of
hedging arrangements. A gentailer could potentially use its position to
restrict the availability of electricity financial contracts for the purpose of
substantially lessening competition.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.52 This prohibition is not intended to:
• extinguish contractual arrangements already on foot or
compromise a generator's ability to meet its commitments
under existing contracts;
• deal with contract illiquidity as a result of physical issues in
the electricity sector; or
• interfere with genuine efficient risk management strategies
by participants in electricity markets, including internal
contracting by a gentailer.
2.53 The Treasurer may make a contracting order, but may not apply
to the court for a divesture order, in relation to a breach of the contract
liquidity prohibition. The contracting order remedy is detailed in Chapter
4, and the other available remedies are detailed in Chapter 3.
What is prohibited conduct relating to contract market liquidity?
2.54 There are three elements to the test for prohibited conduct
relating to electricity financial contract liquidity.
First element - electricity generation
2.55 The first element ensures that only a corporation that generates
electricity, either itself or within its corporate group, is subject to this
limb. Thus, the corporation or a related body corporate must generate
electricity. [Schedule 1, item 1, paragraph 153F(a)]
Second element - behaviour in relation to offering contracts
2.56 The second element describes the ways in which a corporation
might engage in contracting behaviour to limit competition. It is intended
to cover three possible ways in which that might be done, as follows:
• The first is where a corporation fails to offer electricity
financial contracts. A corporation fails to offer such contracts
where it has the ability to do so, but chooses not to. There
may be instances where a corporation does not have the
ability to offer a contract. For example, for operational
reasons, a corporation may not have the ability to offer
electricity financial contracts (such as where its generation
capacity is not sufficiently firm). In these situations, not
offering contracts would not be considered a 'failure' in the
relevant sense.
• The second is where a corporation limits or restricts offers to
enter into electricity financial contracts, for example, where it
significantly reduces the number of electricity contracts it is
willing to enter into.
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Prohibited conduct
• The third is where a corporation offers to enter into
electricity financial contracts in a way that has, or on terms
that have, the effect of limiting or restricting acceptance of
those offers. For example, a corporation may offer electricity
financial contracts on such commercially unattractive terms
that no reasonable counterparty would be likely to accept.
Subparagraph 153F(b)(iii) ensures corporations cannot
circumvent the prohibition by offering electricity financial
contracts with the intention that the offers will not be
accepted.
[Schedule 1, item 1, paragraph 153F(b)]
Example 2.12
Generator A operates a wind farm. Generator A does not enter into
contracts, as its generation assets are not sufficiently firm (that is, it is
difficult to predict whether and when the wind will be blowing to
power its wind farm, so Generator A is unable to guarantee it can meet
its commitments under the contract). In these circumstances, Generator
A has not failed to offer electricity financial contracts, because for
operational reasons it is unable to do so.
2.57 Except in the circumstances described in subparagraph
153F(b)(iii), this element will not be satisfied in circumstances where a
corporation makes a genuine offer to enter into an electricity financial
contract, but the offer is not accepted.
Third element - purpose test
2.58 The third element provides that the behaviour described in the
second element must be engaged in by the corporation for the purpose of
substantially lessening competition in any electricity market. [Schedule 1,
item 1, paragraph 153F(c)]
2.59 A corporation will not breach the prohibition where it engages in
behaviour covered by the second element, but its purpose was not to
substantially lessen competition in any electricity market. This ensures
that electricity market participants may continue their genuine risk
management strategies without falling within the scope of the prohibition.
What is an electricity financial contract?
2.60 The contract market liquidity prohibition is centred on the
offering of 'electricity financial contracts'. The Bill defines an electricity
financial contract as a contract where the rights under the contract are
derived from, or relate to, the price of electricity on an electricity spot
market but where the operator of that spot market is not a party to the
contract. [Schedule 1, item 1, subsection 153C, definition of 'electricity financial
contract']
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.61 This definition is intended to cover the range of derivative
contracts that are used by participants in the electricity industry to wholly
or partially manage their exposure to spot market prices. It does not
include contracts, for the physical supply of electricity through a spot
market, with the operator of that market (the entity responsible for the
settlement of transactions for that physical supply). An example of such
an operator is the AEMO in relation to the NEM. This is intended to
distinguish electricity financial contract market activity, to which this
prohibition applies, from wholesale spot market conduct, to which this
prohibition does not apply.
2.62 An electricity financial contract generally includes:
• bilateral contracts entered into between participants in the
electricity industry, such as generators and retailers, who face
opposing risks in relation to the spot price (these are often
referred to as 'over-the-counter' contracts); and
• exchange traded futures and options, which are highly
standardised contracts traded on an exchange with a
centralised clearing function.
2.63 Examples of the common types of electricity financial contracts
are put and call options (referred to as 'floors', 'caps' and, when
combined, 'collars'), electricity futures, power purchase agreements and
off-take agreements. These agreements typically provide for
compensation to be paid in the amount of the difference between the spot
price and the agreed 'strike' price. These agreements may have other
terms.
2.64 For example, under a swap arrangement entered into between a
generator and a retailer:
• if the spot price is higher than the strike price fixed by the
swap, the generator will pay the retailer the difference; and
• if the spot price is lower than the strike price fixed by the
swap, the retailer will pay the generator the difference.
What is an electricity spot market?
2.65 The term 'electricity spot market' is used in various parts of the
Bill. For example, it is used in the definition of 'electricity financial
contract'. The Bill inserts a definition of the term into the CCA. An
electricity spot market is defined as a spot market for the supply of
electricity. [Schedule 1, item 1, section 153C, definition of 'electricity spot market']
2.66 A spot market is commonly understood to be a market in which
commodities or financial instruments are acquired and supplied, usually
for immediate delivery. The price quoted for the acquisition and supply of
the commodity or instrument is referred to as the 'spot' price. Typically, a
24
Prohibited conduct
spot market will have a centralised clearing function for all trades that
occur on the market. That means that trades are not made directly between
a buyer and a seller, but occur through a market operator or clearing
house.
2.67 An electricity spot market is a form of wholesale market for
electricity that facilitates the exchange of electricity between generators
and retailers (or some others such as large scale industrial users). Because
electricity supply and demand need to be matched instantaneously, an
electricity spot market operates as a market where electricity supply is
'pooled'. All electricity supplied to the market is bought and sold at the
'spot' price.
2.68 In such a spot market:
• generators are paid for the electricity they supply; and
• retailers pay for the electricity they acquire for on-supply to
their customers.
2.69 A spot market operator manages the spot market process,
including matching supply and demand and settling all transactions. For
example, the NEM wholesale spot market is operated by AEMO.
What is an electricity market?
2.70 The financial contract liquidity prohibition prohibits certain
conduct carried out for the purpose of substantially lessening competition
in any electricity market. The Bill inserts a definition of 'electricity
market' into the CCA which covers:
• A market in relation to the supply of electricity is an
electricity market. This covers the wholesale market and the
retail market (see discussion of those markets at paragraph
2.6). [Schedule 1, item 1, section 153C, paragraph (a) of the definition
of 'electricity market']
• A market for electricity financial contracts is also an
electricity market. This covers the financial contract market
discussed in paragraph 2.6. [Schedule 1, item 1, section 153C,
paragraph (b) of the definition of 'electricity spot market']
Purpose of substantially lessening competition
2.71 The conduct set out in paragraph 153F(b) is only prohibited
where the corporation engages in the conduct for the 'purpose of
substantially lessening competition' in any electricity market. [Schedule 1,
item 1, paragraph 153F(c)]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.72 The intention of the 'purpose of substantially lessening
competition' test is to distinguish contracting decisions reflecting genuine,
efficient risk management from contracting decisions with an
anti-competitive purpose.
2.73 The concept of 'substantially lessening competition' is used in
various existing parts of the CCA (see, for example, sections 45, 45B,
45C, 46, 47, 49, 50 and 50A). It is intended to carry the same meaning in
section 153F as it has in other parts of the CCA, adapted to the context of
electricity markets and the conduct described in paragraph 153F(b). By
virtue of section 4G of the CCA, the reference to 'lessening' competition
includes preventing or hindering competition.
2.74 The concept of substantially lessening competition is generally
concerned with the impact on the competitive process rather than the
impact on any particular participant in the market, noting that, in some
instances, harm to an actual or potential individual competitor may also
substantially lessen competition where that competitor represents a strong
competitive constraint.
2.75 The question posed by paragraph 153F(c) is whether the
corporation engaged in conduct for the 'purpose' of substantially
lessening competition. It is not necessary that the conduct has the effect or
likely effect of substantially lessening competition, although the actual or
likely effect of the conduct may be relevant to the assessment of whether
the corporation has the necessary purpose. Where contracting behaviour
may have the effect or likely effect of substantially lessening competition,
but does not have the purpose of substantially lessening competition, the
prohibition will not be contravened. Under paragraph 4F(1)(b) of the
CCA, 'purpose' includes a substantial purpose rather than just a sole
purpose.
2.76 The purpose test requires an objective assessment of all the
relevant facts and circumstances to ascertain whether the corporation
acted for the relevant purpose. This might include, but is not limited to,
evidence about the intent of those acting for the corporation. The purpose
of the corporation can be inferred from all the relevant surrounding
circumstances, including the conduct of the corporation or other persons
(such as its officers or agents). [Schedule 1, item 1, section 153J, items 10 and 11,
paragraph 84(1)(b) and (ba)]
Example 2.13
Gentailer A routinely enters into over-the-counter contracts with three
smaller standalone retailers, Retailers B, C and D.
Retailer B offers an innovative new deal, and quickly becomes a
competitive threat to Gentailer A at the retail level. Gentailer A's
customers begin switching to Retailer B, to take advantage of the deal.
26
Prohibited conduct
Gentailer A continues contracting with Retailers C and D, but refuses
to contract with Retailer B. Gentailer A knows that Retailer B has no
generation assets of its own and that refusing to contract with Retailer
B will make it very difficult for Retailer B to access contracts and
manage its exposure to wholesale spot market volatility. Gentailer A
hopes that Retailer B will be forced to exit the market, restoring
Gentailer A to its former dominant position.
In suddenly refusing to contract with Retailer B, Gentailer A had the
purpose of substantially lessening competition at the retail level.
Example 2.14
Gentailer A, a small gentailer, has a risk management policy under
which it:
• contracts 40 per cent of its generation capacity to its retail arm to
cover its retail customers;
• contracts 40 per cent of its generation capacity to third parties; and
• leaves 20 per cent of its generation capacity uncontracted, to allow
for unplanned outages and maintenance, instead selling this
capacity solely on the wholesale spot market.
Retailer B approaches Gentailer A and asks to enter into an over-the-
counter contract for the last 20 per cent of Gentailer A's generation
capacity. Gentailer A's risk management policy does not allow
Gentailer A to enter into the contract proposed by Retailer B. Gentailer
A has not contravened section 153F, as its failure to offer a contract
did not have the purpose of substantially lessening competition.
Prohibited conduct in the wholesale electricity market
2.77 The third category of prohibited conduct created by the Bill
relates to the wholesale market, and specifically any spot market for the
supply of electricity. This category seeks to prevent generators engaging
in conduct which undermines the effective operation of the electricity spot
market. [Schedule 1, item 1, sections 153G and 153H]
2.78 The rules for the wholesale market category of prohibited
conduct are similar to those existing under rule 542 of the National Gas
Rules.
2.79 The Treasurer may make a contracting order, or apply to the
Court for a divesture order, in relation to an aggravated case of a breach of
the wholesale conduct prohibition. Contacting orders and court ordered
divestiture are not available for a breach of the basic wholesale conduct
prohibition. The contracting order remedy is detailed in Chapter 4 and
court ordered divestiture is detailed in Chapter 5. The other available
remedies are detailed in Chapter 3.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
What is prohibited conduct relating to electricity spot markets?
2.80 The Bill provides for two cases of prohibited conduct relating to
electricity spot markets: a basic case and an aggravated case. Where the
basic case is met, an ACCC response, but not a Treasurer response, can be
applied to remedy the conduct. [Schedule 1, item 1, subparagraphs 153W(e)(ii)
and 153ZA(e)(ii)]
2.81 Where the aggravated case is met, a Treasurer response as well
as an ACCC response can be applied. Each case has two elements that
must be present for the prohibition to apply.
First element - spot market behaviour
2.82 The first element is the same for both cases. It describes the kind
of activities that may result in prohibited conduct. They are that the
corporation either:
• bids or offers to supply electricity on an electricity spot
market; or
• fails to bid or offer to supply electricity on such a market.
[Schedule 1, item 1, paragraphs 153G(a) and 153H(a)]
2.83 This is intended to cover all forms of bidding behaviour on a
spot market, including initial bidding, re-bidding (whereby initial bids are
re-submitted), or failing to bid.
2.84 The concept of a failure to bid or offer to supply electricity is
intended to capture conduct occurring in relation to a spot market that
results in bids or offers not being made, such as decisions about whether
or when to partially or wholly power down a generating unit.
Second element -purpose of behaviour
2.85 Both the basic and aggravated cases look to whether the
behaviour covered by the first element has a particular character or
purpose. In the basic case, the prohibited conduct will be made out where
either of these limbs is present:
• the corporation has acted fraudulently, dishonestly or in bad
faith in carrying out the behaviour; or
• the behaviour has been carried out for the purpose of
distorting or manipulating prices in the electricity spot
market.
[Schedule 1, item 1, paragraph 153G(b)]
2.86 In the aggravated case, both of those limbs must be present for
the prohibited conduct to be made out. [Schedule 1, item 1, paragraph 153H(b)]
2.87 The reason for having two cases of prohibited conduct under the
wholesale spot market category is to ensure that an appropriate response
28
Prohibited conduct
can be applied to the prohibited conduct. The aggravated case captures
more serious behaviour, and it is therefore appropriate that such cases
create the possibility of the more significant remedies and responses.
What is an electricity spot market?
2.88 The meaning of electricity spot market is discussed above at
paragraphs 2.65 to 2.69.
When does a corporation act fraudulently, dishonestly or in bad faith?
2.89 In essence, a corporation would act fraudulently, dishonestly or
in bad faith where its conduct was aimed at obtaining a financial or
competitive advantage by unlawful or unfair means, involved wrongdoing
or was not otherwise of a kind that would be expected of a person acting
according to the standards of a reasonable and honest person. Its meaning
is necessarily derived from the context in which it is used in the Bill, that
is, of conduct in relation to an electricity spot market.
2.90 In making bids or rebids, or choosing not to bid, generators
make representations or provide information to the market. For example,
in placing a bid, a generator is representing to the market that it intends to
dispatch a certain quantity of electricity at a certain price. If, at the time of
placing the bid, the generator does not intend to honour its bid, placing of
that bid is likely to be considered dishonest and an act of bad faith.
When does a corporation act for the purpose of distorting or
manipulating prices?
General principles about distortion or manipulation of prices
2.91 A corporation would act for the purpose of distorting or
manipulating prices in an electricity spot market where its conduct seeks
to undermine the process by which market participants would reasonably
expect prices to be determined in a market characterised by effective
competition.
2.92 In an electricity spot market, prices generally fluctuate in line
with the supply and demand balance as well as fluctuations in the costs of
other inputs (for example, fuel costs), but in the long run should reflect a
market operating with effective competitive constraint.
2.93 The features of effective competition in an electricity spot
market are:
• active competitors in the market with a sustainable position
(rather than just the threat of new entrants);
• low barriers to entry to the market for new competitors; and
• prices largely determined in the long term by underlying
costs rather than the existence of market power.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
2.94 Where these features, particularly the last feature, are
substantially negated or dampened by the deliberate actions of a
corporation, prices would no longer reflect an effective competitive
outcome and would be distorted or manipulated.
2.95 Prices would not be considered distorted or manipulated merely
because they are changed as a result of a corporation's behaviour.
Generators may make many bids each day, and the fact that these bids
alter spot prices is not of itself distortion or manipulation in the relevant
sense.
2.96 The analysis of whether prices have been distorted or
manipulated must distinguish between behaviour which seeks to take
advantage of higher prices (which is permissible under the design of the
spot market), and behaviour which seeks to cause higher prices through
means that are not acceptable features of an electricity spot market.
2.97 Given the complexity of the market, it is not possible to
exhaustively prescribe the conduct which will and will not have the
purpose of distorting manipulating prices. This depends on the specific
facts of the case.
Design features of an energy only spot market
2.98 It is important that the analysis of whether a corporation acted
with the purpose of distorting or manipulating prices be made with
reference to the particular design of electricity spot markets.
2.99 Transitory market power can be an acceptable feature of an
electricity spot market because it can create a signal for investors to invest
in new generation when and where it is needed by the system. When
investors observe transitory market power in action, they are more likely
to invest to bring new generation into the market to take advantage of the
opportunity, which then helps to drive prices back to reflect underlying
costs.
2.100 Similarly, the design of the spot market allows for price spikes.
Short-term price spikes, generally in response to rare peak events, allow
for peaking capacity (with higher start-up and operating costs) to remain
viable, without requiring new generation to be brought into the system
unnecessarily at a cost to consumers.
Example 2.15
Generator A operates a 'peaking plant', which has high fixed capital
costs and high operating costs and is able to quickly increase and
decrease its output. For most of the year, Generator A does not bid
capacity in to the spot market. Generator A waits for price spikes to
occur, and bids in to take advantage of those price spikes. During those
brief spikes, Generator A needs to receive a price which covers both its
operating and fixed capital costs, in order to remain viable in the long
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Prohibited conduct
term. Generator A's bidding strategy is what would reasonably be
expected of a peaking plant operating in an energy only spot market.
Generator A's failure to bid does not have the purpose of distorting or
manipulating prices, as it seeks to take advantage of naturally
occurring high prices but has not caused those high prices. Generator
A's behaviour is not fraudulent, dishonest or in bad faith. Generator A
has not contravened section 153G or 153H.
2.101 Generators are also able to undertake strategies to optimise their
operation, which may also factor in to the price at which a generator bids
in to the market, the amount of capacity they bid in, or a decision not to
bid in on a particular occasion.
2.102 On occasion, generators may engage in economic rationing, that
is, choosing not to bid in to the market at a particular point in time, as a
generator may have limited fuel and an expectation that prices will be
higher in the future. Different generation types would be expected to
display different bidding profiles and have different optimisation
strategies. Similarly, the bidding profile and optimisation strategy of a
standalone generator may be different to that of a gentailer with a
diversified generation portfolio.
Example 2.16
Generator B operates a large coal-fired power station. The plant has
high start-up costs and takes 6-7 hours to 'ramp up' to its full operating
capacity. Generator B's operating costs are $60 per megawatt hour, but
Generator B will bid in at $30 per megawatt hour if necessary to ensure
it is dispatched and able to operate constantly. In ensuring it is
constantly operating, Generator B is ready to respond to a period of
significantly higher prices when supply and demand are tighter,
without incurring the high start-up costs. At these times, Generator B
bids in at higher prices and is able to recoup its overall operating costs.
This is the most efficient way for Generator B to operate.
Generator B's bidding below cost does not have the purpose of
distorting or manipulating prices, as it is simply an optimisation
strategy that would reasonably be expected of a particular plant
operating in an energy only spot market. Generator B has not
contravened section 153G or 153H.
2.103 Bidding and optimisation strategies generally seek to recover a
generator's efficient costs over time, and may change in response to
various market signals such as forecast supply and demand balances.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Example 2.17
Generator C operates a large coal-fired power station. At the start of
spring, Generator C evaluates its coal supplies and determines that it
has a limited supply of coal, an insufficient amount to allow it to
generate at high capacity throughout both spring and summer.
Generator C could use its coal now, when prices are lower, and have
no coal left to take advantage of higher prices in summer. During
spring, Generator C bids in at higher than usual prices, to ensure it
continues to be dispatched but at much lower capacity. Generator C
then bids in significantly higher capacity during summer.
Generator C's behaviour of bidding higher than expected during
Spring does not have the purpose of distorting or manipulating prices,
as it is economic rationing which would reasonably be expected of a
generator with limited fuel supplies. Generator C has not contravened
section 153G or 153H.
2.104 These are considered acceptable features of the electricity spot
market, and part of the efficient operation of the spot market and its
participants. Sections 153G and 153H are not intended to interfere with
behaviour which is genuine commercial behaviour as intended by the
design of the electricity spot market.
Nature of the purpose test
2.105 As with the purpose test under the contract market liquidity
category of prohibited conduct, the purpose test relating to the
manipulation or distortion of prices on a spot market requires an objective
assessment of the substantial purpose of the corporation, having regard to
all relevant facts and circumstances (see paragraph 2.76).
Example 2.18
Generator D operates three power plants, making up a significant
amount of the available capacity in a network region. On a hot summer
day, electricity demand is at its peak and the system is under strain.
Generator D decides to undertake discretionary maintenance on one of
its power plants, and takes that power plant offline for the day.
Generator D could have undertaken the maintenance on a different day,
but knew that if it took one plant offline on this particular day, prices
would spike and the other two plants would make more revenue than if
all three plants were operating.
Generator D is likely to have engaged in behaviour with the purpose of
distorting or manipulating prices, in breach of section 153G.
Example 2.19
Generator E bids in significant capacity at a relatively low price, for an
off-peak dispatch period, one day in advance. Other generators do not
bid in for this dispatch period, as they can't match or beat Generator
E's bid.
32
Prohibited conduct
Just before the dispatch period, Generator E shifts its bid to a
significantly higher price band. When the rebid happens, the other
generators are unable to respond because they have made operational
decisions in response to the original bid. As a result, Generator E is
dispatched at a much higher price than would otherwise have occurred.
Rebidding in response to a change in market conditions is permissible.
However, at the time of placing its original bid, Generator E never
intended to honour its original bid and had planned on rebidding at the
last moment. It is likely Generator E would be considered to have acted
fraudulently, dishonestly or in bad faith in placing its original bid.
Further, Generator E's conduct had the purpose of distorting or
manipulating prices. Generator E is likely to have engaged in
behaviour which breaches both section 153G and 153H.
Prohibited conduct in corporate groups
2.106 Electricity businesses are typically carried on by corporate
groups. For example, vertically integrated electricity businesses (those
that operate in the wholesale, financial contract and retail markets) will be
carried on by corporate groups where various companies in that group
(often a large number) carry on various functions or hold various assets
necessary for the conduct of the business.
2.107 A corporation within a corporate group may engage in conduct
that is prohibited conduct under the Bill. In doing so, it may deal with, or
use assets held by, other companies in the same group. A Treasurer's
contracting order or a court ordered divestiture may need to operate in
relation to assets held, or things to be done, by those other companies,
including where they are acting in the capacity of trustee.
2.108 To achieve this, the Bill provides that certain body corporates
may be subject to a Treasurer's contracting order or a court ordered
divestiture if they are related to a corporation that engages in prohibited
conduct. These body corporates do not themselves need to be corporations
as defined in the CCA. But they do need to be engaged in certain dealings
with, or their assets need to be used by, the corporation actually engaging
in the prohibited conduct. Alternatively they need to be the holding
company of such a corporation or body corporate.
2.109 The Bill creates a concept of a connected body corporate in
relation to prohibited conduct. If an entity is such a connected body
corporate, it may become subject to a Treasurer's response, as discussed
in Chapters 4 and 5, and may receive, or be named in, a prohibited
conduct notice and recommendation (see Chapter 6). [Schedule 1, item 1,
section 153C, definition of 'connected body corporate')]
2.110 Three categories of entity may be a connected body corporate in
relation to prohibited conduct.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
First category - corporation actually engaging in prohibited conduct
2.111 A 'corporation', as defined in subsection 4(1) of the CCA, is a
connected body corporate in relation to prohibited conduct actually
engaged in by that corporation. [Schedule 1, item 1, subsection 153D(1)]
Second category - group company associated with prohibited conduct
2.112 A body corporate is a connected body corporate in relation to
prohibited conduct engaged in by a corporation if:
• the body corporate is 'related' to the corporation (within the
meaning of subsection 4A(5) of the CCA); and
• either the prohibited conduct involves direct or indirect
dealings between the body corporate and the corporation
engaging in that conduct or the direct or indirect use of assets
held by the body corporate.
[Schedule 1, item 1, subsection 153D(2)]
2.113 A body corporate covered by this category does not need to be a
'corporation' as defined in subsection 4(1) of the CCA.
2.114 This category of company needs to be treated as a connected
body corporate because it may hold assets (for example, electricity
generation assets) that should be subject to a court ordered divestiture or it
may be an arm of the corporate group that should be subject to a
Treasurer's contracting order.
2.115 The term 'dealings' includes all kinds of dealings including
entering into contracts, arrangements or understandings.
2.116 Two group companies would deal with each other 'indirectly'
where the dealings are conducted through interposed entities (such as
other group companies) and via intermediaries. A similar principle applies
to the indirect use of assets.
Third category - holding company
2.117 A body corporate is a connected body corporate in relation to
prohibited conduct engaged in by a corporation if it is a 'holding
company' (within the meaning of subsection 4A(4) of the CCA) of
another body corporate that is a connected body corporate in relation to
that prohibited conduct. That would be the case where the body corporate
is a holding company of:
• the corporation actually engaging in the prohibited conduct
(the first category of connected body corporate); or
• a body corporate associated with the prohibited conduct in
the defined way (the second category of connected body
corporate); or
34
Prohibited conduct
• a body corporate that is itself a holding company by a
previous application of section 153D.
[Schedule 1, item 1, subsection 153D(3)]
2.118 A body corporate covered by this category also does not need to
be a 'corporation' as defined in subsection 4(1) of the CCA.
2.119 This category of company needs to be treated as a connected
body corporate because it may hold shares in another group company (for
example, one that holds electricity generation assets) that should be
subject to a court ordered divestiture.
Example 2.20 - How the connected body corporate rules apply
Parent Co Ltd is a publicly listed corporation that is the holding
company of a corporate group carrying on a vertically integrated
energy business. The group contains a number of wholly owned
companies.
Wholesale Pty Ltd, a subsidiary of Parent Co Ltd, bids to supply
electricity to an electricity spot market. However, the assets that
generate the electricity for which the bids are made are owned by
Generation Asset No. 1 Pty Ltd, an indirectly owned subsidiary of
Parent Co Ltd (via Generation Holdings Pty Ltd). Wholesale Pty Ltd
contracts with Generation Asset No. 1 Pty Ltd in relation to those
generation assets.
Wholesale Pty Ltd engages in conduct that is prohibited under
section 153H, by bidding in bad faith for the purpose of distorting or
manipulating prices in the spot market.
This diagram illustrates the group structure and the connections
between group companies.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Wholesale Pty Ltd is a connected body corporate in relation to the
prohibited conduct because it has actually engaged in it.
Generation Asset No. 1 Pty Ltd is a connected body corporate in
relation to the prohibited conduct engaged in by Wholesale Pty Ltd.
That is because:
• it has contracted with Wholesale Pty Ltd in relation to the supply of
electricity to which the prohibited conduct relates (and its
generation assets have also been used to produce the electricity);
and
• it is related to Wholesale Pty Ltd under subsection 4A(5) of the
CCA.
In addition:
• Generation Holdings Pty Ltd is a connected body corporate in
relation to the prohibited conduct because it is a holding company
of Generation Asset No. 1 Pty Ltd; and
• Parent Co Ltd is a connected body corporate in relation to the
prohibited conduct because it is the holding company of Wholesale
Pty Ltd (and also because it is the holding company of Generation
Holdings Pty Ltd).
As a consequence, the Federal Court could make a divestiture order
requiring one of the following:
• Generation Asset No. 1 Pty Ltd to dispose of some or all of its
electricity generation assets;
• Generation Holdings Pty Ltd to dispose of its shares in Generation
Asset No. 1 Pty Ltd;
• Parent Co Ltd to dispose of its shares in Generation Holdings Pty
Ltd.
36
Chapter 3
ACCC responses
Outline of chapter
3.1 This Chapter explains the remedies the ACCC may use if it
reasonably believes a corporation has engaged, or is engaging, in
prohibited conduct in the electricity sector. It also explains some
amendments to the CCA relating to the operations of the ACCC.
Context of amendments
3.2 A range of responses are available to respond to a corporation
that the ACCC reasonably believes has engaged or is engaging in
prohibited conduct.
3.3 The graduated responses available to the ACCC provide
flexibility to enable the ACCC to respond appropriately to the alleged
prohibited conduct that is identified. More serious cases may warrant
consideration of a Treasurer response (detailed in Chapters 4 and 5
below).
Summary of new law
3.4 If the ACCC reasonably believes that a corporation has engaged,
or is engaging in prohibited conduct, it may:
• issue a public warning notice;
• issue an infringement notice;
• accept a court enforceable undertaking from the corporation;
• apply to a court for an injunction;
• apply to a court for a pecuniary penalty.
Detailed explanation of new law
3.5 The range of responses available to the ACCC if it reasonably
believes that a corporation has engaged, or is engaging, in prohibited
conduct are set out below.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
3.6 The prohibited conduct provisions set out in Division 2 of
Part XICA do not limit the operation of other provisions of the CCA that
may also apply in respect of a corporation's conduct. [Schedule 1, item 1,
section 153K]
3.7 The Treasurer is not permitted to direct the ACCC in respect of
its functions under Part XICA. [Schedule 1, item 5, paragraph 29(1A)(a)]
Public warning notices
3.8 The ACCC may issue a public warning notice to a corporation
for engaging in prohibited conduct after providing the corporation with an
opportunity to make representations in relation to specified matters
including the alleged conduct.
Public warning notice procedure
Draft notice
3.9 The ACCC may give a corporation a draft public warning notice
in writing if it reasonably believes that:
• the corporation has engaged in, or is engaging in, prohibited
conduct;
• the conduct has resulted in, or is likely to result in, detriment
to a person or persons; and
• it is in the public interest to issue the notice.
[Schedule 1, item 1, subsection 153L(1)]
3.10 The notice must identify the alleged prohibited conduct and
explain the reasons why the ACCC reasonably believes that the
corporation has engaged in the prohibited conduct, that the conduct has
resulted in detriment or likely detriment to one or more persons, and that it
is in the public interest to issue the notice. [Schedule 1, item 1,
paragraphs 153L(2)(a), (b) and (c)]
3.11 The corporation has 21 days to make representations to the
ACCC regarding the prohibited conduct, the detriment identified, and
whether it is in the public interest to publish the notice. [Schedule 1, item 1,
paragraph 153L(2)(d)]
3.12 A draft notice is not a legislative instrument within the meaning
of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1,
subsection 153L(3)]
Final notice
3.13 The ACCC may issue a public warning notice if 21 days have
passed after issuing a draft notice and the ACCC still reasonably believes:
38
ACCC responses
• the corporation has engaged in, or is engaging in, the
prohibited conduct;
• the conduct has resulted in, or is likely to result in, detriment
to a person or persons; and
• it is in the public interest to issue the notice.
[Schedule 1, item 1, subsections 153M(1) and (2)]
3.14 The public warning notice cannot be issued if more than 90 days
have passed since the ACCC gave the corporation the draft notice.
[Schedule 1, item 1, paragraph 153M(1)(c)]
3.15 The public warning notice must state the date of issue and
identify the corporation and prohibited conduct. [Schedule 1, item 1,
subsection 153M(3)]
3.16 A public warning notice is not a legislative instrument within the
meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1,
subsection 153M(4)]
'Reasonably believes'
3.17 The provisions require the ACCC to form a reasonable belief of
the matters detailed above. This is the standard 'reasonable belief' test that
requires both an objective and subjective assessment of the belief held.
Infringement notices
3.18 The ACCC may issue an infringement notice to a corporation if
it has reasonable grounds to believe that the corporation has contravened a
prohibited conduct provision. [Schedule 1, item 1, subsection 153N(1)]
3.19 The amendments apply the existing infringement notice
provisions in Division 5 of Part V of the CCA (existing sections 60L,
60M, 60N, 60P, 60Q and 60R) to an alleged contravention of the
prohibited conduct provisions (new sections 153E, 153F, 153G and
153H).
3.20 The existing framework provides that, inter alia, the
infringement notice must be issued within 12 months of the alleged
contravention, and cannot relate to more than one alleged contravention
(see subsection 60L(3)).
3.21 The penalty for an infringement notice issued to a corporation in
respect of the prohibited conduct provisions is 600 penalty units.
[Schedule 1, item 1, subsection 153N(2)]
3.22 The corporation has 28 days to pay the infringement notice,
which may be extended once by the ACCC for a further 28 days (see
section 60P).
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
3.23 If a corporation pays the infringement notice within the
compliance period, the ACCC cannot take any further court action in
relation to the alleged contravention in the infringement notice (see
section 60M). If the corporation does not pay the infringement notice, the
ACCC may institute proceedings (under Part VI of the CCA) for
contravention of the prohibited conduct provisions (see section 60N).
Court enforceable undertakings
3.24 The ACCC may accept a court enforceable undertaking from a
corporation in respect of the matters in the new Part XICA of the CCA.
3.25 The ACCC's existing powers and processes in respect of written
undertakings (see section 87B) apply automatically to the new Part XICA.
Injunctions
3.26 The ACCC may apply to a court for an injunction to stop (or
otherwise direct) a corporation that has engaged in or is engaging in
prohibited conduct. A court can grant an injunction on the terms that it
determines to be appropriate.
3.27 The amendments extend the existing enforcement provisions
regarding injunctions to the new Part XICA. [Schedule 1, items 8 and 9,
subparagraphs 80(1)(a)(iv) and 80(1)(a)(v)]
Pecuniary penalties
3.28 The ACCC may apply to a court for a pecuniary penalty in
respect of contraventions of the prohibited conduct provisions.
3.29 The amendments extend the existing pecuniary penalty
provisions to the new Part XICA. [Schedule 1, item 6,
subparagraph 76(1)(a)(iiia)]
3.30 In certain circumstances individuals who have been involved in
contraventions of the prohibited conduct provisions may also be liable for
a pecuniary penalty.
3.31 The amendments limit the liability for pecuniary penalties to
directors, secretaries or senior managers of the corporation:
• who have aided, abetted, counselled or procured a
corporation to engage in prohibited conduct;
• who have induced, or attempted to induce, a corporation,
whether by threats or promises or otherwise, to engage in
prohibited conduct;
40
ACCC responses
• who have been in any way, directly or indirectly, knowingly
concerned in, or party to, the engage in prohibited conduct;
or
• who have conspired with others for a corporation to engage
in prohibited conduct. [Schedule 1, item 1, section 153ZD]
3.32 Directors, secretaries and senior managers are defined in the
Corporations Act 2001. [Schedule 1, item 1, section 153ZD]
3.33 The maximum penalty that a corporation can be subject to is the
greatest of the following:
• $10,000,000;
• if the Court can determine the total value of the benefits that
have been obtained by one or more persons and that are
reasonably attributable to the conduct - 3 times that value;
and
• if the Court cannot determine the total value of the benefits
that have been obtained - 10 per cent of the annual turnover
of the body corporate during the 12 months prior to the
conduct occurring.
[Schedule 1, items 6 and 7, subparagraph and paragraph 76(1)(a)(iiia) and
76(1A)(aa)]
3.34 The maximum penalty that an individual can be subject to is
$500,000 [Schedule 1, item 1, subparagraph 76(1)(a)(iiia) and paragraph 76(1B)(b)]
3.35 In determining the appropriate penalty amount, the Court will
have regard to all relevant matters including the nature of the conduct and
the circumstances in which the conduct took place.
3.36 Under the existing penalty provisions, where a corporation has
been ordered to pay a pecuniary penalty, the ACCC may apply for the
Court to make an adverse publicity order (see section 86D). An adverse
publicity order is an order that requires the corporation to disclose and
publish particular information to certain persons as specified. These
provisions apply automatically to the new Part XICA.
Information gathering powers
3.37 The ACCC's existing powers to obtain information, documents
and evidence under section 155 of the CCA will apply for the purposes of
the ACCC performing its functions under new Part XICA. The Bill also
amends section 155 to ensure that the ACCC has the ability to adequately
investigate compliance with any orders that may be made (see Chapters 4
and 5). [Schedule 1, item 12, subparagraphs 155(2)(b)(vi) and (vii)]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Secrecy
3.38 Information that relates to matters in Part XICA is protected
information for the purposes of the CCA, which means that the ACCC
may only disclose it in limited circumstances. [Schedule 1, item 13,
subsection 155AAA(21), paragraph (a) of the definition of 'core statutory provision']
42
Chapter 4
Treasurer's contracting orders
Outline of chapter
4.1 This Chapter explains the provisions in Division 5 of new
Part XICA that set out the procedures that must be followed for:
• the making and enforcement of a Treasurer's contracting
order on a corporation or other body corporate to address
alleged prohibited conduct; and
• varying or revoking a Treasurer's contracting order.
Summary of new law
4.2 Following the receipt of a prohibited conduct recommendation
from the ACCC, the Treasurer can issue a written order to the corporation
or another body corporate identified in that recommendation and order it
to make offers to enter into electricity financial contracts with third party
entities.
Detailed explanation of new law
4.3 Following the receipt of a prohibited conduct recommendation
from the ACCC, the Treasurer may, in writing, order the corporation or
other body corporate identified in that recommendation to make offers to
enter into electricity financial contracts with third party entities (called a
'contracting order').
4.4 This order is part of the suite of responses that can be used to
remedy alleged prohibited conduct engaged in by corporations.
4.5 A contracting order will essentially require vertically integrated
electricity businesses ('gentailers') to make contracts available to third
parties.
4.6 A contracting order can be used as a means of remedying
prohibited conduct under the financial contract liquidity and wholesale
market (aggravated case) categories.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
When can the Treasurer make a contracting order?
4.7 The Bill sets out the circumstances in which the Treasurer can
make a contracting order. The making of such an order will follow the
ACCC notice and recommendation procedure, which may culminate in a
recommendation to the Treasurer that he or she make a contracting order
(see Chapter 6). [Schedule 1, item 1, section 153C, definition of 'contracting order']
4.8 The Treasurer can make a contracting order in respect of a body
corporate if he or she is satisfied that all these conditions are met:
• the ACCC has given a prohibited conduct recommendation to
the Treasurer;
• the body corporate is identified in the ACCC's
recommendation;
• the order is being made no later than 45 days after the ACCC
gave the Treasurer the recommendation, or varied
recommendation (a prohibited conduct notice provided by
the ACCC to the Treasurer could be varied, in which case the
45 days for Treasurer consideration of the recommendation
would start from the time of the variation - see Chapter 6);
• the order is of a kind that was stated in the ACCC's
recommendation to the Treasurer;
• the conduct identified in the ACCC recommendation is
prohibited conduct by the corporation specified in the
recommendation;
• the order is a proportionate means of preventing the
corporation that engaged in the prohibited conduct, or a
related body corporate, from engaging in that kind of
prohibited conduct in the future.
[Schedule 1, item 1, section 153W]
4.9 The Treasurer can only make a contracting order where the
prohibited conduct in question arises under section 153F (electricity
financial contract liquidity) or section 153H (electricity spot market
(aggravated case)) in the new Part XICA. [Schedule 1, item 1,
subparagraph 153W(e)(ii)]
Which body corporates can be subject to a Treasurer's contracting
order?
4.10 The body corporate upon which a Treasurer's contracting order
is imposed could be the corporation that has actually engaged in the
prohibited conduct. Alternatively, it could be another connected body
corporate in relation to the prohibited conduct. That would be another
company in the corporate group that has been involved in some way with
44
Treasurer's contracting orders
the corporation in relation to the prohibited conduct, or a relevant holding
company (see discussion at paragraphs 2.106 to 2.119 above). It is
possible that an ACCC prohibited conduct recommendation might
recommend orders against more than one connected body corporate in
relation to prohibited conduct engaged in by a corporation.
When is an order 'of a kind' stated in a prohibited conduct
recommendation?
4.11 A Treasurer's contracting order needs to be 'of a kind'
recommended by the ACCC. For that to be the case, the Treasurer can
only make a contracting order if the ACCC has recommended a
contracting order. However, the specifics of the order do not need to be
identical to that recommended by the ACCC.
4.12 For example, a contracting order made by the Treasurer against
a body corporate would be of the same kind as that recommended by the
ACCC if the ACCC recommended a contracting order against that body
corporate or a connected body corporate in relation to the prohibited
conduct covered by the recommendation. However, the particular matters
covered by the Treasurer's contracting order (for example, the periods to
which the order should apply) do not need to be identical to those
recommended by the ACCC.
When is an order a proportionate means of preventing future prohibited
conduct?
4.13 To make a contracting order, the Treasurer must be satisfied that
the order is a proportionate means of preventing the corporation that
engaged in the prohibited conduct, or a related body corporate, from
engaging in that kind of conduct in the future. Proportionality requires that
the overall order is necessary to prevent that kind of conduct from
continuing or re-occurring in the future, and that a lesser remedy would
not achieve this. That means that the Treasurer must be satisfied that the
order does not require things to be done that are not necessary to prevent
the body corporate from engaging in the kind of prohibited conduct in the
future.
4.14 This requirement refers to preventing 'related' body corporates
from engaging in prohibited conduct in the future to ensure that other
members of the offending corporation's corporate group do not engage in
that kind of prohibited conduct in the future.
4.15 Conduct will be of the same kind as other prohibited conduct if
it would be prohibited under the same provision in Division 2 of
Part XICA (see Chapter 2). For example, if a corporation engaged in
conduct covered by a recommendation to the Treasurer that was
prohibited under the electricity financial contract liquidity category in
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
section 153F, the Treasurer's contracting order should be a proportionate
means of preventing any future prohibited conduct in that category.
What is a contracting order?
4.16 The Treasurer may, in writing, order a body corporate to enter
into electricity financial contracts. [Schedule 1, item 1, section 153C, definition of
'contracting order', and subsection 153X(1)]
4.17 An electricity financial contract is generally a derivative contract
designed to hedge exposure to electricity spot market prices (see
discussion of the meaning of that term in Chapter 2).
4.18 The written contracting order must:
• state that it is made under section 153X and the day on which
it is made;
• identify the prohibited conduct to which the order relates;
• identify the body corporate that must comply with the order
and the corporation that has engaged in the prohibited
conduct (if that is a different body corporate);
• explain the reasons for the Treasurer being satisfied that the
conditions for the making of the order are met; and
• specify details about what the order requires (referred to as
'matters').
[Schedule 1, item 1, subsection 153X(2)]
4.19 A contracting order must specify these matters:
• the kind of offers to enter into electricity financial contracts
that the body corporate must make;
• the manner in which the body corporate must make those
offers;
• the kinds of entities to which those offers must be made;
• the period or periods during which the offers must be made;
and
• any other matters the Treasurer considers necessary for the
order to be effective.
[Schedule 1, item 1, subsection 153X(3)]
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Treasurer's contracting orders
What are the kinds of offers that must be made under a contracting
order?
4.20 The Bill sets out the ways in which a contracting order can
specify the kinds of electricity financial contract that the body corporate
must offer. These may cover:
• the type of electricity financial contract (that is, the specific
type of derivative contract);
• the price or range of prices for the electricity covered by the
derivative contract; and
• the minimum number of megawatt hours of electricity that
must be offered.
[Schedule 1, item 1, subsection 153X(4)]
4.21 There are a range of electricity financial contracts (such as caps
and swaps) that a body corporate could be required to offer (as identified
in Chapter 2). The particular type of electricity contract that would be
specified will depend upon the individual facts and circumstances of the
case.
4.22 For example, under a base load swap contract, the parties lock in
the price for a fixed amount of electricity at all times of the day to hedge
against the fluctuating spot price of electricity. Under a contracting order
requiring a base load swap contract, the body corporate could be obliged
to offer contracts that lock in the price of electricity. Under a flat cap
contract, one party to the contract has the ability to purchase a given
amount of electricity from the counterparty at an agreed fixed price. This
would generally be where the spot price of electricity is higher than the
agreed fixed price in the contract. Under a contracting order requiring a
flat cap contract, the body corporate must offer contracts where they could
be the counterparty required to sell the given amount of electricity at the
agreed fixed price.
4.23 The price or the range of prices for the electricity to be paid
under the particular electricity financial contract will depend upon the
individual facts and circumstances of the connected body corporate
subject to the order. It may be necessary to specify a price or range of
prices to ensure the connected body corporate cannot circumvent the order
by making offers at prices well above their market value, such that no
reasonable counterparty would be likely to accept the offers.
4.24 In determining the minimum number of megawatt hours, the
Treasurer must have regard to the following matters:
• the total electricity generation capacity of the generation
assets held by the corporate group;
• the nature and location of the electricity generation assets;
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• the existing commitments to supply electricity to the
customers of the corporate group; and
• any other matter the Treasurer considers to be relevant.
[Schedule 1, item 1, subsection 153X(5)]
4.25 Consideration of the total electricity generation capacity of the
generation assets held by each relevant body corporate related to the
prohibited conduct ensures that the minimum number of megawatt hours
specified in the contracting order is proportionate to the total generation
capacity of the body corporates involved.
4.26 The Treasurer would need to have regard to the operating
capacity and characteristics of particular generation assets, not just their
nameplate capacity. For example, ageing plants with declining reliability
are often unable to operate at their full nameplate capacity. Therefore, in
determining the minimum number of megawatt hours, the Treasurer
would need to have regard to operational management considerations of
the body corporate and its corporate group, such as managing the risks of
unplanned outages and maintenance requirements.
4.27 Consideration of the nature and location of those electricity
generation assets reflects that the body corporate's generation assets may
vary widely in terms of their type and operational characteristics (such as
baseload, peaking or intermittent generators). For example, a body
corporate's generation assets may only be able to produce electricity
intermittently, depending on their location or the time of day.
4.28 Consideration of the existing commitments to supply electricity
to the retail customers of the corporate group ensures that the Treasurer
must consider a retailer's ability to continue to supply electricity to its
own customers (that is, their retail load), despite a contracting order.
4.29 Connected body corporates may have a wide range of available
generation capacity and different types of generation assets that could be
related to a contracting order. Therefore, the Treasurer must have regard
to the list of factors in light of the individual circumstances of each case in
determining the minimum number of megawatt hours that the contracting
order should specify.
4.30 In order to comply with the order, a body corporate must offer
the electricity financial contracts over the period or periods stated in the
order. The period must start after six months from the date the order is
made and end no later than three years after the order is made. [Schedule 1,
item 1, subsection 153X(6)]
4.31 The Treasurer must make public the fact that the contracting
order has been made, the day on which the order was made, and the name
of the body corporate. The details of the order are not to be published.
[Schedule 1, item 1, subsection 153X(7)]
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Treasurer's contracting orders
Variation or revocation of Treasurer's contracting orders
4.32 A contracting order may be varied or revoked in writing by the
Treasurer either on the Treasurer's own initiative or on application made
by the body corporate. [Schedule 1, item 1, subsection 153Y(1)]
4.33 The Treasurer can make a variation of a contracting order in
respect of a body corporate if he or she is satisfied that all these conditions
are met:
• the order as varied is a proportionate means of preventing the
relevant corporation, or a related body corporate, from
engaging in that kind of prohibited conduct in the future; and
• if the body corporate does not consent to the variation, a
variation can only be made if the variation is minor or
insubstantial (for example, to correct typographical or minor
errors) or the Treasurer is satisfied that:
- the corporate or any related body corporate gave the
Treasurer or the ACCC information that was false or
misleading in a material particular or failed to give
relevant information that is not publicly available; and
- the variation is reasonably necessary to address the type
of misinformation provided to the Treasurer or the ACCC.
[Schedule 1, item 1, subsection 153Y(2)]
4.34 Generally, the Treasurer can make variations to a contracting
order if the body corporate consents to the variation. This could be where
the changes would advantage the body corporate.
4.35 In the event that the body corporate does not consent to the
variation, paragraph 153Y(2)(b) sets out two situations in which the
Treasurer can vary a contracting order.
4.36 In the first situation, this would allow the Treasurer to make
variations to correct minor or insubstantial errors made in the order.
4.37 In the second situation, the variation allows for changes which
could disadvantage the body corporate. However, these are justified
because the changes must be as a result of the corporation giving false or
misleading information in a material particular or omitting to give relevant
information to the ACCC or the Treasurer.
4.38 A variation can be of a kind that results in the Treasurer's
contracting order, as varied, being different to the kind recommended in
the prohibited conduct recommendation (in accordance with
paragraph 153S(2)(d) of new Part XICA). [Schedule 1, item 1,
subsection 153Y(3)]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
4.39 The Treasurer does not need to consider an application by the
body corporate to vary or revoke an order if the application is made after
the end of the period in which the body corporate must comply with the
order. If a contracting order contains more than one period to comply,
then it is taken to be when all the periods have ended. [Schedule 1, item 1,
subsection 153Y(4)]
4.40 The Treasurer must make public information relating to the
varied or revoked contracting order electronically or by any other means.
[Schedule 1, item 1, subsection 153Y(5)]
4.41 The information that must be published is:
• the fact that the contracting order has been varied or revoked;
• the name of the corporation that is named in the contracting
order; and
• the day on which the contracting order was varied or
revoked.
Other details relating to the variation or revocation are not be
made public.
[Schedule 1, item 1, subsection 153Y(5)]
Enforcement of Treasurer's contracting orders
4.42 The Bill includes a provision to enable a Treasurer's contracting
order to be enforced by the Federal Court. This is necessary because
ultimately only a court can require the necessary action to be taken by a
body corporate subject to a Treasurer's contracting order.
4.43 Under the enforcement provision, the ACCC can apply to the
Federal Court for court orders seeking compliance with a Treasurer's
contracting order. The ACCC can do that where it considers that the body
corporate subject to the Treasurer's contracting order has not complied
with it. [Schedule 1, item 1, subsections 153Z(1) and (2)]
4.44 The Bill amends the ACCC's information gathering power in
section 155 of the CCA to ensure that the ACCC can gather information
relevant to determining whether a body corporate has complied with a
Treasurer's contracting order. This may be necessary in order for the
ACCC to decide whether an application to the Federal Court for
enforcement is required. [Schedule 1, item 12, subparagraphs 155(2)(b)(vi)]
4.45 The new enforcement provision allows the Federal Court to
make an order directing the body corporate to comply with a Treasurer's
contracting order. If the period or periods in any of the Treasurer's
contracting orders has already passed, the Federal Court can make an
order directing the body corporate to comply with the Treasurer's
contracting order by a new period or periods specified in the order. The
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Treasurer's contracting orders
Federal Court can also make such other orders as it considers appropriate.
[Schedule 1, item 1, subsection 153Z(3)]
Review of Treasurer's contracting orders
4.46 A body corporate subject to a Treasurer's contracting order can
seek judicial review of the decisions made by the Treasurer under
Division 5 through the standard avenues such as the Administrative
Decisions (Judicial Review) Act 1977 and section 39B of the Judiciary
Act 1903.
Acquisition of property
4.47 To the extent that the operation of a provision in Division 5 in
new Part XICA of the CCA or any other provision of the CCA to the
extent that it relates to Division 5 would result in an acquisition of
property from a person otherwise than on just terms within the meaning of
section 51(xxxi) of the Constitution, the provision does not have any
operation and the remainder of the CCA continues in operation.
[Schedule 1, item 1, section 153ZC]
51
Chapter 5
Court ordered divestiture
Outline of chapter
5.1 This Chapter explains the provisions in Division 6 of new
Part XICA that set out the procedures that must be followed for:
• the Treasurer to apply to the Federal Court for a divestiture
order; and
• the Federal Court to make a divestiture order on a
corporation or other body corporate.
Summary of new law
5.2 Following the receipt of a prohibited conduct recommendation
from the ACCC, the Treasurer may make an application to the Federal
Court for a divestiture order.
5.3 If the Federal Court is satisfied that the relevant requirements
are met, the Federal Court can make an order to the corporation or another
body corporate identified in the application and order it to dispose of
interests in securities or assets that are part of its electricity business.
Detailed explanation of new law
5.4 Following the receipt of a prohibited conduct recommendation
from the ACCC, the Treasurer can apply to the Federal Court to make a
divestiture order (called a 'divestiture order application').
5.5 If the Federal Court is satisfied that the relevant requirements
are met, the Federal Court can make an order to the corporation or another
body corporate identified in the application and order it to dispose of
interests in securities or assets that are part of its electricity business
(called a 'divestiture order').
5.6 This order is part of the suite of responses that can be used to
remedy alleged prohibited conduct engaged in by corporations.
5.7 A court ordered divestiture is intended to be used as a last resort
in the most exceptional circumstances where other responses available to
the ACCC and the Treasurer would not sufficiently address the alleged
prohibited conduct. A divestiture order would only be an appropriate
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
response where the Federal Court has found that the relevant corporation
has engaged in prohibited conduct under section 153H (electricity spot
market (aggravated case)).
When can the Treasurer apply to the Federal Court for a divestiture
order?
5.8 The Bill sets out the circumstances in which the Treasurer can
apply to the Federal Court for a divestiture order to be imposed on a
corporation or body corporate. The divestiture order application will
follow the ACCC notice and recommendation procedure, which may
culminate in a recommendation to the Treasurer that he or she apply to the
Federal Court for a divestiture order (see Chapter 6). [Schedule 1, item 1,
section 153C, definition of 'divestiture order']
5.9 The Treasurer can apply to the Federal Court to make a
divestiture order in respect of a body corporate if he or she is satisfied that
all these conditions are met:
• the ACCC has given a prohibited conduct recommendation to
the Treasurer;
• the body corporate is identified in the ACCC's
recommendation;
• the application is made no later than 45 days after the ACCC
gave the Treasurer the recommendation, or varied
recommendation (a prohibited conduct notice provided by
the ACCC to the Treasurer could be varied, in which case the
45 days for Treasurer consideration of the recommendation
would start from the time of the variation - see Chapter 5);
• the order applied for is of a kind that was stated in the
ACCC's recommendation to the Treasurer;
• the conduct identified in the ACCC recommendation is
prohibited conduct by the corporation specified in the
recommendation;
• the order applied for is a proportionate means of preventing
the corporation that engaged in the prohibited conduct, or a
related body corporate, from engaging in that kind of
prohibited conduct in the future;
• the order applied for will, or is likely to, result in a public
benefit that would, or would be likely to, outweigh any
public detriment.
[Schedule 1, item 1, section 153ZA]
5.10 The Treasurer can only apply to the Federal Court for a
divestiture order where the prohibited conduct in question arises under
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Court ordered divestiture
section 153H (electricity spot market (aggravated case)) in the new
Part XICA. [Schedule 1, item 1, subparagraph 153ZA(e)(ii)]
When would an order be 'of a kind' stated in a prohibited conduct
recommendation?
5.11 To apply to the Federal Court for a divestiture order, the
Treasurer needs to be satisfied that such an order would be 'of a kind'
recommended by the ACCC. That means that the Treasurer can only
apply to the Federal Court for a divestiture order if the ACCC has
recommended a divestiture order. However, the specifics of the order
applied for do not need to be identical to that recommended by the ACCC.
5.12 For example, an application to the Federal Court for a divestiture
order against a body corporate would be of the same kind as that
recommended by the ACCC if the ACCC recommended a divestiture
order against that body corporate or a connected body corporate in
relation to the prohibited conduct covered by the recommendation.
When can the Federal Court make a divestiture order?
5.13 The Bill sets out the circumstances in which the Federal Court
can make a divestiture order.
5.14 The Federal Court may, on the application of the Treasurer,
make a divestiture order if the Federal Court is satisfied that the following
conditions are met:
• the Federal Court finds, or has in another proceeding
instituted under the CCA found, that the conduct identified in
the prohibited conduct recommendation is in fact prohibited
conduct engaged in by the relevant corporation and is or
includes prohibited conduct under section 153H (electricity
spot market (aggravated case);
• the Federal Court is satisfied that the order is a proportionate
means of preventing the corporation that engaged in the
prohibited conduct, or a related body corporate, from
engaging in that kind of prohibited conduct in the future.
[Schedule 1, item 1, section 153C, definition of 'divestiture order', and
subsection 153ZB(1)]
5.15 The Court must satisfy itself that the conditions for making the
divestiture order, including that a contravention of section 153H has been
found, have been met. For the avoidance of doubt, the Bill is not intended
to affect ordinary Court practices and procedures that apply in the making
of analogous orders, for example section 81 of the CCA.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Which body corporates can be subject to the Court's divestiture order?
5.16 The body corporate upon which a Court's divestiture order is
imposed could be the corporation that has actually engaged in the
prohibited conduct. Alternatively, it could be another connected body
corporate in relation to the prohibited conduct. That would be another
company in the corporate group that has been involved in some way with
the corporation in relation to the prohibited conduct, or a relevant holding
company (see discussion at paragraphs 2.106 to 2.119 above). It is
possible that an ACCC prohibited conduct recommendation might
recommend orders against more than one connected body corporate in
relation to prohibited conduct engaged in by a corporation.
When is a divestiture a proportionate means of preventing future
prohibited conduct?
5.17 The Treasurer, in applying for a divestiture order, and the
Federal Court, in making such an order, must both be satisfied that the
order is a proportionate means of preventing the corporation that engaged
in the prohibited conduct, or a related body corporate, from engaging in
that kind of conduct in the future. Proportionality requires that the overall
order is necessary to prevent that kind of conduct from continuing or re-
occurring in the future, and that a lesser remedy would not achieve this.
That means that the Treasurer and the Federal Court must be satisfied that
the order does not require things to be done that are not necessary to
prevent the body corporate from engaging in the kind of prohibited
conduct in the future.
5.18 This requirement refers to preventing 'related' body corporates
from engaging in prohibited conduct in the future to ensure that other
members of the offending corporation's corporate group do not engage in
that kind of prohibited conduct in the future.
5.19 Conduct will be of the same kind as other prohibited conduct if
it would be prohibited under the same provision in Division 2 of
Part XICA (see Chapter 2). For example, if a corporation engaged in
conduct covered by a recommendation to the Treasurer that was
prohibited under the electricity spot market (aggravated case) in
section 153H, the divestiture order should be a proportionate means of
preventing any future prohibited conduct in that category.
Net public benefit test
5.20 In applying to the Federal Court for the divestiture order, the
Treasurer must also be satisfied that the divestiture order will, or is likely
to, result in a public benefit that would, or would be likely to, outweigh
any public detriment. This test is only relevant to the Treasurer's
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Court ordered divestiture
consideration of whether to apply to the Federal Court for a divestiture
order.
What is a divestiture order?
5.21 A divestiture order allows the Federal Court to order a body
corporate to dispose of all or part of their interests in securities or assets.
[Schedule 1, item 1, paragraph 153ZB(2)(a)]
5.22 The Federal Court can also impose upon the body corporate
particular conditions which it must comply with to preserve the value of
the security or asset or the commercial operation of the asset prior to its
disposal. [Schedule 1, item 1, paragraph 153ZB(2)(b)]
5.23 A divestiture order must specify these matters:
• the interests in the securities and assets, or the kinds of
interests in the securities and assets, that the body corporate
must dispose of;
• the day by which the body corporate must make the disposal;
and
• any other matter the Federal Court considers necessary for
the order to be effective.
[Schedule 1, item 1, subsection 153ZB(5)]
5.24 The day by which the body corporate must dispose of the
interests must be no earlier than 12 months from the day the divesture
order is made. The Federal Court can allow for a longer period (than the
minimum period of 12 months) for the body corporate to sell the assets.
[Schedule 1, item 1, subsection 153ZB(6)]
5.25 A divestiture order could require that a body corporate dispose
of its interests in the underlying tangible or intangible assets that it holds
as part of its electricity business. Alternatively, a divestiture order could
be issued to the holding company that holds an interest in the securities of
the company or trust that holds the underlying tangible or intangible
assets. In the second case, the divestiture order would direct the holding
company to dispose of its interests in the securities in the company or
trust.
What is an 'interest' in a security or an asset?
5.26 The Bill adopts the same definitions of interest in an asset, and
interest in a security as in the Foreign Acquisitions and Takeovers Act
1975. [Schedule 1, item 1, subsection 153C, definition of 'interest']
5.27 A security is a share in a corporation or a unit in a unit trust. A
person holds an interest in a security if they have any legal or equitable
interest in that security. Therefore, a divestiture order may require that the
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
body corporate must dispose of any of the legal or equitable interests it
holds in the shares in a corporation or in the units in a unit trust.
5.28 A person holds an interest in an asset if they have any legal or
equitable interest in that asset. Therefore, a divestiture order may require
that the body corporate must dispose of any of the legal or equitable
interests it holds in any assets it owns or leases.
Who can the disposal be made to?
Disposals by non-government body corporates
5.29 If the body corporate subject to the divestiture order is not an
authority of the Commonwealth, State or Territory, the Court may order
that it can dispose of the relevant interest to any entity that is not a body
corporate that is related to it (within the meaning of subsection 4A(5) of
the CCA) or is not an associate of the body corporate. Essentially, this
requires the body corporate to make the disposal to an arm's length third
party purchaser. [Schedule 1, item 1, paragraph 153ZB(2)(a)]
5.30 The body corporate will need to ensure any disposal complies
with other laws regulating acquisitions and disposals, such as section 50
of the CCA and the Foreign Acquisitions and Takeovers Act 1975, as
applicable.
Disposals by government authorities
5.31 Amendments made by the House of Representatives to this
Schedule provides that if the body corporate subject to the divesture order
is an authority of the Commonwealth, State or Territory, the Court may
order that it dispose of the relevant interest to a body corporate that the
same government has an equal or greater controlling interest in as the
body corporate subject to the divesture order. For that to occur, the
purchaser must genuinely be in competition in relation to electricity
markets with the body corporate subject to the divestiture order.
[Schedule 1, item 1, subsections 153ZB(3) and (4)]
5.32 This means that, if a divestiture order is made in respect of a
partial or fully government owned vendor body corporate, it can only
allow a disposal to a purchaser body corporate that the same government
has an equal or greater controlling interest in. The amendment will not
allow government owned electricity assets to be either fully or further
divested to any non-government entity than the body corporate that is
subject to the divestiture order.
What is an 'associate' of the body corporate?
5.33 The Bill adopts the definition of associate from the Foreign
Acquisitions and Takeovers Act 1975. [Schedule 1, item 1, subsection 153C,
definition of 'associate']
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Court ordered divestiture
5.34 The term associate is defined broadly. The following people are
associates of a person:
• a person's 'relative' within the meaning given by the
Income Tax Assessment Act 1997;
• any person with whom the person is acting, or proposes to
act, in concert in relation to an action to which the Foreign
Acquisitions and Takeovers Act 1975 may apply;
• any person with whom the person carries on a business in
partnership;
• any entity of which the person is a senior officer;
• if the person is an entity, any holding entity and any senior
officer of the entity;
• any entity whose senior officers are accustomed to or under
an obligation, whether formal or informal, to act in
accordance with the directions, instructions or wishes of the
person, or, if the person is an entity, the senior officers of the
entity;
• an entity if the person is accustomed or under an obligation,
whether formal or informal, to act in accordance with the
directions, instructions or wishes of the entity or the senior
officers of the entity;
• any corporation in which the person holds a 'substantial
interest' (within the meaning of the Foreign Acquisitions and
Takeovers Act 1975);
• if the person is a corporation, a person who holds a
substantial interest in the corporation;
• the trustee of a trust in which the person holds a substantial
interest;
• if the person is a trustee of a trust, a person who holds a
substantial interest in the trust;
• in particular circumstances for a person who is a foreign
government.
5.35 Subject to the exception discussed in paragraph 5.31 above, a
body corporate that is subject to a divestiture order must not dispose of its
interest in the relevant security or asset to any persons who can be
identified as an associate of the body corporate. If a body corporate does
dispose of its interest to an associate, the body corporate would not have
complied with the requirements of the divestiture order.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Conditions that can be imposed on the body corporate vendor
5.36 Under a divestiture order the Federal Court can specify that the
body corporate must comply with specific conditions during the period
between the day the order is made and the day of the disposal of the
relevant interest. That can be done if the Federal Court is satisfied that the
conditions are necessary to preserve:
• the value of the interest; or
• the commercial operation of an asset (if the interest is an
interest in an asset).
[Schedule 1, item 1, subsection 153ZB(7)]
5.37 The conditions may relate to the interest to be disposed or if the
interest is a share or other security in a body corporate, the exercise of
rights attached to the share or other security. [Schedule 1, item 1,
subsection 153ZB(8)]
5.38 The conditions imposed on the body corporate vendor are a
safeguard to ensure that the asset being disposed of must continue to be
properly maintained and operated in the ordinary course of business and
ready for the future disposal to a third party.
5.39 Conditions are limited to those necessary to preserve the value
or commercial operation of the interest or asset. For example, a condition
may require the body corporate to adopt a particular accounting method,
or appoint an independent director to maintain oversight over the
operation of the business while the disposal is still pending.
Fair Work Act 2009
5.40 Subsection 153ZB(9) was inserted by an amendment to
Schedule 1 in the House of Representatives which addresses an interaction
between the consequences of making a divestiture order and sections 311
and 768AD of the Fair Work Act 2009.
5.41 Broadly, Part 2-8 of the Fair Work Act 2009 provides for the
transfer of enterprise agreements, certain modern awards and other
instruments if there is a 'transfer of business' (as defined in
subsection 311(1) of the Fair Work Act 2009) from one 'national system
employer' (as defined in section 14 of the Fair Work Act 2009) to another
national system employer. Subsection 311(1) of the Fair Work Act 2009
sets out the requirements for there to be a transfer of business. The
provisions in Part 2-8 of the Fair Work Act 2009 benefit 'transferring
employees' (as defined in subsection 311(2) of the Fair Work Act 2009)
only.
5.42 Part 6-3A of the Fair Work Act 2009 provides for the transfer of
certain terms and conditions of employment where there is a transfer of
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Court ordered divestiture
business from a State public sector employer to a national system
employer. Subsection 768AD(1) sets out the requirements that must be
satisfied for there to a transfer of business from a State public sector
employer to a national system employer.
5.43 One of the requirements for there to be a transfer of business
under the Fair Work Act 2009 is that there must be a 'connection' of a
specified kind between the old employer and the new employer
(paragraphs 311(1)(d) and 768AD(1)(d)). This requirement will be
satisfied if, in accordance with an arrangement between the old employer
and the new employer, the new employer owns or has the beneficial use of
some or all of the assets that were owned or used by the old employer, and
those assets relate to, or are used in connection with, the 'transferring
work'.
5.44 A divestiture order is likely to be given effect by way of contract
between the body corporate vendor and the body corporate purchaser.
This could occur as either:
• an arrangement disposing of the underlying assets of a
business of the body corporate; or
• an arrangement disposing of securities issued by the body
corporate holding the underlying assets of a business.
5.45 To remove any doubt whether a sale of assets under a divestiture
order would satisfy paragraph 311(1)(d) or 768AD(1)(d) of the
Fair Work Act 2009, new subsection 153ZB(9) deems a connection
between the old employer (the body corporate vendor) and the new
employer (the body corporate purchaser) as referred to in
subsection 311(3) or 768AD(2) of the Fair Work Act 2009. [Schedule 1,
item 1, subsection 153ZB(9)]
5.46 The note in subsection 153ZB(9) describes the consequence of
the subsection.
5.47 Subsection 153ZB(9) operates at the time the body corporate
disposes of its interest in the assets, rather than when the Federal Court
makes the divestiture order.
5.48 Subsection 153ZB(9) does not apply to a divestiture order where
a body corporate disposes of interests in securities. This is because
sections 311 and 768A of the Fair Work Act 2009 only applies to business
transfers that are effected by way of asset transfers of the underlying
business. It does not apply where the securities issued by the entity
holding the assets of the underlying business are transferred. In this
scenario, if the entity has employees, the identity of their employer does
not change and therefore the existing employment relationships remain
the same.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Acquisition of property
5.49 To the extent that the operation of a provision in Division 6 in
new Part XICA of the CCA or any other provision of the CCA to the
extent that it relates to Division 6 would result in an acquisition of
property from a person otherwise than on just terms within the meaning of
section 51(xxxi) of the Constitution, the provision does not have any
operation and the remainder of the CCA continues in operation.
[Schedule 1, item 1, section 153ZC]
62
Chapter 6
Prohibited conduct notices and
recommendations
Outline of chapter
6.1 This Chapter explains the provisions in Division 4 that set out
the notice and recommendation procedures that must be followed before
an order can be made in respect of a corporation or other body corporate.
Summary of new law
6.2 Division 4 of new Part XICA of the CCA allows the ACCC to:
• give a prohibited conduct notice to a corporation that the
ACCC reasonably believes has engaged in certain kinds of
prohibited conduct;
• give a prohibited conduct recommendation to the Treasurer
explaining the reasons why the ACCC believes the
corporation has engaged in the prohibited conduct and
making recommendations for the Treasurer to take further
action; and
• give a no Treasurer action notice to the Treasurer explaining
that the ACCC considers that a prohibited conduct
recommendation is not appropriate.
6.3 There are restrictions on the kinds of prohibited conduct that can
result in a divestiture or contracting order. The Treasurer may only make a
contracting order in response to prohibited conduct in relation to the
electricity financial contract market or the wholesale electricity market.
Additionally, the Treasurer may only apply to the Federal Court for a
divestiture order in response to prohibited conduct in relation to the
wholesale electricity market.
6.4 The provisions also set out when and how the ACCC may vary
or revoke the prohibited conduct notice, prohibited conduct
recommendation, or no Treasurer action notice.
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Detailed explanation of new law
6.5 Division 4 allows the ACCC to:
• give a prohibited conduct notice to a corporation that the
ACCC reasonably believes has engaged in prohibited
conduct;
• give a prohibited conduct recommendation to the Treasurer;
• give a no Treasurer action notice; and
• vary a prohibited conduct notice, prohibited conduct
recommendation or a no Treasurer action notice.
6.6 These notices are designed to enable the ACCC to notify a
corporation if the ACCC reasonably believes, based on the information
available, that the corporation has engaged in prohibited conduct.
The ACCC must provide reasons for that belief.
6.7 The prohibited conduct notice must also identify the further
action or actions that the ACCC could recommend that the Treasurer take,
and the reasons that the ACCC reasonably believes that the particular
action or actions identified would be a proportionate way of preventing
the corporation or another body corporate from engaging in the prohibited
conduct in the future.
6.8 The prohibited conduct notice procedure ensures that the
corporation is afforded natural justice by giving the corporation an
opportunity to respond and make representations in relation to the
contents of the prohibited conduct notice.
6.9 Following the prohibited conduct notice, the ACCC must give
the Treasurer either:
• a recommendation that the Treasurer:
- make a contracting order; or
- apply to the Federal Court for a divestiture order; or
• a 'no Treasurer action notice', which means that the
Treasurer will not make an order.
6.10 At every stage of these notices, the ACCC must consider
whether a Treasurer's response it recommends is a proportionate and
targeted response to prevent the corporation from engaging in the kind of
prohibited conduct in the future. This is a high threshold and is a
safeguard to ensure that any response recommended by the ACCC to the
Treasurer is measured and necessary.
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Prohibited conduct notices and recommendations
Prohibited conduct notices
6.11 The ACCC may give a corporation a written prohibited conduct
notice that includes recommendations for the kind of action that the
Treasurer could take in response to prohibited conduct undertaken by the
corporation. [Schedule 1, item 1, section 153C, definition of 'prohibited conduct
notice', and subsection 153P(1)]
6.12 The ACCC may only make a prohibited conduct notice if the
ACCC reasonably believes that the following conditions are satisfied:
• the corporation has engaged or is engaging in prohibited
conduct; and
• that an order made in line with the recommendation set out in
the prohibited conduct notice would be a proportionate
means of preventing the corporation or any of its related
body corporates from engaging in that kind of prohibited
conduct in the future.
[Schedule 1, item 1, paragraphs 153P(1)(a) and (b)]
6.13 If the prohibited conduct notice includes a recommendation that
the Treasurer apply to the Federal Court for a divestiture order, there are
additional conditions that the ACCC must consider before giving the
corporation the notice. The ACCC must reasonably believe that:
• such a divestiture order will result, or is likely to result, in a
benefit to the public; and
• if the divestiture order will result, or is likely to result, in a
detriment to the public, the benefit to the public would or is
likely to outweigh the detriment to the public.
[Schedule 1, item 1, paragraph 153P(1)(c)]
6.14 The prohibited conduct notice must set out the following:
• the relevant section of the CCA under which the notice is
being issued;
• the date the notice is issued;
• the identity of the corporation;
• the identity of any other connected body corporate in relation
to the prohibited conduct;
• the prohibited conduct that the ACCC reasonably believes
has been engaged in, or that is being engaged in, and the
reasons for the ACCC's belief;
• the recommendations that the ACCC is proposing to make in
relation to the prohibited conduct; and
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• state that the corporation may make representations in
response to the prohibited conduct notice, and specify the
time that the corporation has to make the representations
(this is ordinarily 45 days, unless the ACCC allows more
time).
[Schedule 1, item 1, subsections 153P(2) and (3)]
6.15 Additionally, the notice must explain the reasons why the ACCC
reasonably believes that the recommended Treasurer's response is a
proportionate means of preventing the prohibited conduct in the future.
If the notice includes a recommendation that a divestiture order be made,
the notice must also provide the reasons that the ACCC reasonably
believes that such an order would be of net benefit to the public.
[Schedule 1, item 1, paragraph 153P(2)(e)]
6.16 The notice must state that the corporation may make
representations to the ACCC regarding the prohibited conduct in the
prohibited conduct notice. This gives the corporation the opportunity to
provide the ACCC with information about the prohibited conduct that the
ACCC reasonably believes has been engaged in, including information
that may result in the ACCC no longer having a reasonable belief that the
corporation has engaged in the prohibited conduct. [Schedule 1, item 1,
paragraph 153P(2)(f)]
6.17 The ACCC must provide a copy of the notice to each connected
body corporate in relation to the prohibited conduct. If the ACCC fails to
identify all the connected body corporates in relation to the prohibited
conduct, this does not invalidate the notice. This ensures that the notice
stands even if, for example, the ACCC fails to identify connected body
corporates that have only a tangential relationship to the prohibited
conduct. [Schedule 1, item 1, subsections 153P(4) and (5)]
6.18 A prohibited conduct notice given by the ACCC is not a
legislative instrument within the meaning of subsection 8(1) of the
Legislation Act 2003. [Schedule 1, item 1, subsection 153P(6)]
Variation and revocation of a prohibited conduct notice
6.19 The ACCC may vary or revoke a prohibited conduct notice that
has been given to a corporation. [Schedule 1, item 1, subsection 153Q(1)]
6.20 The ACCC may consider that variation or revocation of a
prohibited conduct notice is appropriate because:
• the corporation has made representations, requested the
notice be revoked or varied, or provided further information;
• the ACCC becomes aware of new information which is
relevant to the original notice or becomes aware of an error in
the original notice; or
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Prohibited conduct notices and recommendations
• there is another reason that the ACCC believe that variation
or revocation of the prohibited conduct notice is necessary.
6.21 As soon as practicable after it is made, the ACCC must give the
written variation or revocation of the notice to the corporation, to any
body corporate identified in the original prohibited conduct notice, and to
any connected body corporate identified in a notice that has been varied,
6.22 The variation or revocation must contain the following items:
• the date on which the notice has been varied or revoked; and
• in the case of a variation, state that the corporation may make
representations (within a specified time frame) to the ACCC
responding to the variation.
[Schedule 1, item 1, subsections 153Q(2) and (3)]
6.23 The specified time period starts from the day the variation is
issued and ends either:
• 45 days after the variation or revocation is issued; or
• at a later date that the ACCC allows.
[Schedule 1, item 1, subsection 153Q(3)]
6.24 A variation or revocation of a prohibited conduct notice given
by the ACCC is not a legislative instrument within the meaning of
subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1,
subsection 153Q(5)]
6.25 Subsection 33(3) of the Acts Interpretation Act 1901 has been
excluded because there are requirements that the ACCC must comply with
if it varies or revokes a prohibited conduct notice. The Acts Interpretation
Act provision is excluded from operating to ensure that these are effective.
[Schedule 1, item 1, subsection 153Q(6)]
Prohibited conduct recommendation and no Treasurer action notice
6.26 Following the issue of a prohibited conduct notice, the ACCC
must give to the Treasurer:
• a prohibited conduct recommendation; or
• a no Treasurer action notice.
6.27 The recommendation or notice must be given to the Treasurer
within 45 days of:
• the end of the period stated in the prohibited conduct notice
within which the corporation had to make representations to
the ACCC in relation to the prohibited conduct notice; or
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• the end of the period stated in a variation of the prohibited
conduct notice.
[Schedule 1, item 1, subsections 153R(1) to (3)]
6.28 The ACCC must also give the Treasurer a prohibited conduct
recommendation if it has revoked a no Treasurer action notice on the basis
that, in the circumstances, it is appropriate to issue a prohibited conduct
recommendation. For more information on the revocation of a no
Treasurer action notice see paragraphs 6.57 to 6.60. [Schedule 1, item 1,
subsections 153R(4) and (5)]
Prohibited conduct recommendation
6.29 The ACCC may give the Treasurer a written prohibited conduct
recommendation if the ACCC reasonably believes that the following
conditions are satisfied:
• the corporation has engaged or is engaging in the kind of
prohibited conduct specified in the prohibited conduct notice;
• that an order made by the Treasurer or the Federal Court
imposed on the corporation or a relevant body corporate in
relation to the prohibited conduct would be a proportionate
means of preventing the corporation or any of its related
body corporates from engaging in that kind of prohibited
conduct in the future.
[Schedule 1, item 1, section 153C, definition of 'prohibited conduct
recommendation', and paragraphs 153S(1)(a) and (b)]
6.30 If the relevant conditions are met, the prohibited conduct
recommendation may include more than one recommendation in relation
to the prohibited conduct.
6.31 If the ACCC recommends that the Treasurer apply to the Federal
Court for a divestiture order, there are additional beliefs that the ACCC
must reasonably hold. These are that:
• such a divestiture order will result, or is likely to result, in a
benefit to the public; and
• if a divestiture order will result, or is likely to result, in a
detriment to the public, the benefit to the public would or is
likely to outweigh the detriment to the public.
[Schedule 1, item 1, paragraph 153S(1)(c)]
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Prohibited conduct notices and recommendations
6.32 The prohibited conduct recommendation must set out the
following:
• the relevant section of the CCA that the notice is being issued
under;
• the date it is issued;
• the identities of all of the following:
- the corporation;
- each of the connected body corporates in relation to the
prohibited conduct; and
• the prohibited conduct that the ACCC reasonably believes
that the corporation has engaged in or is engaging in, and the
reasons why the ACCC believes that;
• the recommendations for the kind of order the Treasurer or
Federal Court should make in order to prevent the
corporation or its related body corporates from engaging in
that kind of prohibited conduct in the future, and explain the
reasons justifying why the ACCC is recommending these
Treasurer responses.
[Schedule 1, item 1, subsection 153S(2)]
6.33 The ACCC's recommendation or recommendations can be
different to the recommendation or recommendations in the prohibited
conduct notice. This enables the ACCC to amend its recommendation or
recommendations to the Treasurer to take into account representations
made by the corporation in response to the prohibited conduct notice.
[Schedule 1, item 1, subsection 153S(3)]
6.34 A notice is still valid if the ACCC does not identify each and
every relevant body corporate in relation to the prohibited conduct in the
notice. [Schedule 1, item 1, subsection 153S(4)]
6.35 The ACCC can identify new body corporates or remove body
corporates compared to the body corporates the ACCC identified in the
original prohibited conduct notice. This is to allow the ACCC to take into
account representations made in response to the original notice. However,
if the Treasurer subsequently makes an order or applies to the Federal
Court for a divestiture order in relation to a connected body corporate then
that connected body corporate must have been identified in the
recommendation. [Schedule 1, item 1, subsection 153S(5), paragraphs 153W(a)
and (b) and 153ZA(a) and (b)]
6.36 A prohibited conduct notice given by the ACCC is not a
legislative instrument within the meaning of subsection 8(1) of the
Legislation Act 2003. [Schedule 1, item 1, subsection 153S(6)]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Variation and revocation of a prohibited conduct recommendation
6.37 A prohibited conduct recommendation may be varied or revoked
by the ACCC. A recommendation can only be varied or revoked by the
ACCC within 45 days of:
• the day the ACCC made the prohibited conduct
recommendation; or
• the day the ACCC made a variation to the prohibited conduct
recommendation.
[Schedule 1, item 1, subsections 153T(1) and (2)]
6.38 A variation or revocation of the prohibited conduct
recommendation cannot be made if the Treasurer has already applied to
the Federal Court for a divestiture order or made a contracting order in
relation to the recommendation. [Schedule 1, item 1, subsections 153T(3)]
6.39 A variation can only be made in two situations:
• the variation is minor or insubstantial; or
• all of the following conditions are met:
- the corporate or any related body corporate gave the
ACCC false or misleading information or failed to give
relevant information; and
- the variation is reasonably necessary to address the type
of misinformation provided to the ACCC.
[Schedule 1, item 1, subsections 153T(4)]
6.40 In the first situation, this would allow the ACCC to make
variations to correct minor or insubstantial errors made in the
recommendation.
6.41 In the second situation, the ACCC could vary the
recommendation to make changes that could disadvantage the
corporation. However, these are justified because such changes must be as
a result of the corporation giving false or misleading information in a
material particular or omitting to give relevant information to the ACCC.
6.42 The ACCC must give the written variation or revocation of the
notice to the Treasurer as soon as practicable and it must contain the day
the notice has been varied or revoked. [Schedule 1, item 1, subsections 153T(5)
and (6)]
6.43 A variation or revocation of a prohibited conduct
recommendation given by the ACCC is not a legislative instrument within
the meaning of subsection 8(1) of the Legislation Act 2003. [Schedule 1,
item 1, subsection 153T(7)]
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Prohibited conduct notices and recommendations
6.44 Subsection 33(3) of the Acts Interpretation Act 1901 has been
excluded because the variation or revocation of a recommendation
requires conditions that the ACCC must meet to do be able to do this. The
Acts Interpretation Act provision is excluded from operating to ensure that
these are effective. [Schedule 1, item 1, subsection 153T(8)]
No Treasurer action notice
6.45 The ACCC must give the Treasurer a written no Treasurer
action notice if the ACCC considers that it is not appropriate to give the
Treasurer a prohibited conduct recommendation in respect of the
prohibited conduct notice. [Schedule 1, item 1, section 153C, definition of 'no
Treasurer action notice', and subsection 153U(1)]
6.46 The ACCC may consider that it is not appropriate to give the
Treasurer a prohibited conduct recommendation for a number of reasons.
For example, following representations in response to the prohibited
conduct notice the ACCC may no longer reasonably believe that the
corporation has engaged in prohibited conduct, or the ACCC may no
longer consider that the recommendation set out in the notice is a
proportionate means of preventing the prohibited conduct in the future.
6.47 The no Treasurer action notice must set out the following:
• the relevant section of the CCA under which the notice is
being issued;
• the date the notice is issued;
• the reasons why the ACCC considers that it is not appropriate
for a prohibited conduct recommendation to be given.
[Schedule 1, item 1, subsection 153U(2)]
6.48 45 days after giving the Treasurer the no Treasurer action notice,
the ACCC must give the notice to the named corporation, unless the
Treasurer and the ACCC agree that it is appropriate to provide the notice
at an earlier time. [Schedule 1, item 1, subsection 153U(3)]
6.49 A no Treasurer action notice given by the ACCC is not a
legislative instrument within the meaning of subsection 8(1) of the
Legislation Act 2003. [Schedule 1, item 1, subsection 153U(4)]
Variation and revocation of no Treasurer action notice
6.50 A no Treasurer action notice may be varied or revoked by the
ACCC. The ACCC may make a variation or revocation within 45 days of:
• the day the ACCC made the no Treasurer action notice; or
• the day the ACCC made a variation to the no Treasurer
action notice.
[Schedule 1, item 1, subsections 153V(1) and (2)]
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
6.51 A variation or revocation of a no Treasurer action notice must
state the day on which it is made and the ACCC must give it to the
Treasurer as soon as practicable after it is made. [Schedule 1, item 1,
subsections 153V(7) and (8)]
6.52 A variation or revocation of a no Treasurer action notice given
by the ACCC is not a legislative instrument within the meaning of
subsection 8(1) of the Legislation Act 2003. [Schedule 1, item 1,
subsection 153V(11)]
6.53 Subsection 33(3) of the Acts Interpretation Act 1901 has been
excluded because the variation or revocation of a recommendation
requires conditions that the ACCC must meet to do be able to do this. The
Acts Interpretation Act provision is excluded from operating to ensure that
these are effective. [Schedule 1, item 1, subsection 153V(12)]
Variation
6.54 A variation of a no Treasurer action notice may only be made if
the ACCC is satisfied that the variation is minor or insubstantial.
[Schedule 1, item 1, subsection 153V(3)]
6.55 If the no Treasurer action notice has already been given to the
corporation when the ACCC makes their variation, then the ACCC must
provide a copy of the variation to the corporation as soon as possible after
making it. [Schedule 1, item 1, subsections 153V(9)]
6.56 If the no Treasurer action notice has not yet been given to the
corporation when the ACCC makes the variation, then the variation must
not be given to the corporation. Instead, the varied notice is subject to the
same requirements as the original no Treasurer action notice
(see paragraph 6.48). [Schedule 1, item 1, subsection 153V(10)]
Revocation
6.57 A no Treasurer action notice can only be revoked if the ACCC
reasonably believes that:
• it is appropriate to give the Treasurer a prohibited conduct
recommendation, or to give the corporation a new prohibited
conduct notice; and
• the ACCC reasonably believes that either of the following
conditions are met:
- a revocation is reasonably necessary to address false or
misleading information provided by the corporation or
any related body corporate, or a failure by them to give
the ACCC relevant information, in response to the
prohibited conduct notice; or
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Prohibited conduct notices and recommendations
- the revocation is reasonably necessary to address new
information or information that the ACCC did not have
when the prohibited conduct notice was given.
[Schedule 1, item 1, subsection 153V(4) to (6)]
6.58 If the ACCC is satisfied that the tests for revocation are met, and
revokes a no Treasurer action notice, then the ACCC must either give the
Treasurer a prohibited conduct recommendation in relation to the
prohibited conduct notice, or give the corporation a new prohibited
conduct notice within 45 days of the revocation. [Schedule 1, item 1,
subsections 153R(4) and (5)]
6.59 If the no Treasurer action notice has already been provided to
the corporation when the ACCC makes its revocation, then the ACCC
must provide the revocation to the corporation as soon as possible after
making it. [Schedule 1, item 1, subsection 153V(9)]
6.60 However, if the no Treasurer action notice has not been given to
the corporation before it is revoked, then a copy of the revocation must
not be given to the corporation. A copy is not required to be provided to
the corporation as the ACCC will issue a prohibited conduct notice to the
corporation, or a prohibited conduct recommendation to the Treasurer.
[Schedule 1, item 1, subsections 153V(10), 153R(4) and 153R(5)]
73
Chapter 7
AER information gathering
Outline of chapter
7.1 Schedule 2 amends the CCA to:
• confer new compulsory information gathering powers on the
AER;
• allow the AER to share information with other agencies; and
• facilitate the conferral of functions related to the regulation of
retail electricity prices on the AER.
Context of amendments
7.2 Recommendation 30 of the ACCC's Retail Electricity Pricing
Inquiry is that, in non-price regulated jurisdictions, the standing offer and
standard retail contract should be abolished and replaced with a default
market offer at or below the price set by the AER. Recommendation 32 is
that, if an electricity retailer chooses to advertise using a headline discount
claim, it must calculate the discount from the reference bill amount
published by the AER. These recommendations are concerned with
standing offers made to residential customers. Recommendations 49 and
50 deal with the extension of these recommendations to small businesses.
7.3 These recommendations were implemented through a mandatory
industry code - the Electricity Retail Code of Conduct - prescribed (under
section 51AE of the CCA) in Part 2 of the Competition and Consumer
(Industry Code-Electricity Retail) Regulations 2019. The code
commenced on 4 April 2019. Associated functions (such as the
determination of maximum standing offer prices for supplying electricity
to small customers) were conferred (under section 44AH(b) of the CCA)
on the AER in Part 3 of those Regulations.
7.4 Schedule 2 gives the AER the information-gathering powers it
requires to perform these associated functions and makes other technical
amendments to facilitate the implementation of the recommendations in
this way.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Summary of new law
7.5 Schedule 2 amends the CCA to:
• confer new compulsory information gathering powers on the
AER;
• allow the AER to share information with other agencies;
• clarify that regulations made for section 44AH(b) of the CCA
may confer power on the AER to make disallowable or non-
disallowable legislative instruments; and
• allow the Electricity Retail Code of Conduct regulating
electricity retailers to incorporate any non-disallowable
legislative instruments made by the AER as in force or
existing from time to time.
Detailed explanation of new law
New compulsory information gathering powers
7.6 The AER has compulsory information gathering powers under
the national energy laws (for example, section 28 of the National
Electricity Law), but these powers cannot be used in relation to its
Commonwealth functions. New section 44AAFA fills this gap.
7.7 The power may be exercised if the AER has reason to believe
that a person is capable of providing information, producing a document
or giving evidence that the AER requires for the performance of its
Commonwealth functions, including the functions conferred by including
the functions conferred by Part 3 of the Competition and Consumer
(Industry Code-Electricity Retail) Regulations 2019. This is the same
threshold that applies to the exercise of its compulsory information
gathering powers under the national energy laws. [Schedule 2, item 5,
subsection 44AAFA(1)]
7.8 Persons must be given written notice of the requirement to
provide information, produce a document or appear before the AER, and
when that must be done. Minimum time limits have not been included, so
as to maintain consistency with the AER's corresponding powers in the
national energy laws. Nevertheless, it is expected that a person would be
given the same amount of time to comply with a notice issued under
section 44AAFA as they would be given under the corresponding
provisions in the national laws. [Schedule 2, item 5, subsections 44AAFA(2) and
(3)]
7.9 If a notice requires a person to appear before the AER to give
evidence, the AER may require the evidence to be given on oath or
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Prohibited conduct notices and recommendations
affirmation. This is consistent with the ACCC's compulsory information
gathering powers (section 155(3) of the CCA) and proposed amendments
to the corresponding provisions in the national energy laws. [Schedule 2,
item 5, subsection 44AAFA(4)]
7.10 Failure to comply with a notice is an offence punishable by
imprisonment for 2 years or 100 penalty units, or both. This is the same as
the penalty for contravening a notice issued by the ACCC
(section 155(6A) of the CCA). Non-compliance is excused if the person is
incapable of complying with the notice (for example, because a requested
document does not exist) or if they cannot locate a document after
reasonable searches. These excuses mirror those that apply in relation to
an ACCC notice (section 155(5A), (5B) and (6) of the CCA). [Schedule 2,
item 5, section 44AAFB]
7.11 Other laws relating to giving information to Commonwealth
entities will apply in relation to a person's compliance with section
44AAFB. This includes provisions in the Criminal Code Act 1995
(Criminal Code) which provides a person may commit an offence if the
person gives false or misleading information or produces false or
misleading documents to the AER (see sections 137.1 and 137.2 of the
Criminal Code).
7.12 Section 44AAFA does not affect the right of an individual to
refuse to give information etc. on the ground that the information might
tend to incriminate the individual. Nor does it affect the right of a person
to refuse to give information on the ground that the information is subject
to legal professional privilege or that disclosure is contrary to the public
interest (for example, in relation to Cabinet documents). This is consistent
with the exceptions set out in the national energy laws. However, a person
is not excused from complying with a notice on the ground of any duty of
confidence or on the ground that compliance might tend to expose the
person to a civil penalty.
7.13 A person who wishes to rely on the defence contained in
subsection 44AAFB(2) bears the evidential burden of proving the
circumstance (per subsection 13.3(3) of the Criminal Code). That is, the
person must produce evidence that suggests that the person is not capable
of complying with the notice. A person who wishes to rely on the defence
contained in subsection 44AAFB(3) bears the legal burden of proving
that, after a reasonable search, the person is not aware of a requested
document (subsection 13.4(b) of the Criminal Code). That is, the person
must prove, on the balance of probabilities that, after a reasonable search,
the person is not aware of a requested document (section 13.5 of the
Criminal Code).
7.14 The reverse burden of proof is appropriate in the circumstances
of this provision. The capacity of a person to comply with a notice, and
information as to whether a person has undertaken a reasonable search for
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
a requested document, are all matters that are peculiarly within the
person's knowledge and would not generally be available to the
prosecution. Affected persons (generally, electricity retailers) are expected
to maintain thorough records of their business activities. Raising evidence
of their capacity to comply with a notice, or proving on the balance of
probabilities that they have undertaken a reasonable search for a
document, should place no significant additional burden on them.
7.15 If the burden of proof were not reversed, the prosecutor would
be required to undertake costly and difficult investigations. In many cases
the prosecutor may have some difficulty accessing information about the
person's capacity to comply with a notice or whether they have undertaken
a reasonable search for a requested document. This could in turn
undermine the effectiveness of the information gathering regime and the
ability of the AER to perform its Commonwealth functions.
7.16 The AER may make copies of any document produced in
compliance with a notice, and may retain the document for as long as
necessary. In the meantime, the person who is otherwise entitled to the
document is entitled to be supplied with a certified copy of it. This mirrors
the arrangements that apply to documents produced to the ACCC under its
compulsory information gathering powers (section 156 of the CCA).
[Schedule 2, item 5, section 44AAFC]
Use and disclosure of information
7.17 Information collected under the AER's new compulsory
information gathering powers may only be used or disclosed in
accordance with section 44AAF of the CCA. That section authorises
disclosures required or permitted by an Australian law, disclosures to
specified or prescribed bodies, and use or disclosure in the course of the
performance of the AER's functions and powers or in prescribed
circumstances.
7.18 New section 44AAF(3A) authorises (but does not require) the
AER to disclose information to another agency (Departments, bodies and
office holders established or appointed for a public purpose by the
Governor-General, a Minister or under Commonwealth law) if the AER is
satisfied that the information will enable or assist the agency to perform or
exercise its functions or powers. The AER may impose conditions that
must be complied with in relation to that information. [Schedule 2, item 3,
subsections 44AAF(3A), (3B) and (5)]
7.19 The amendment is modelled on ASIC's disclosure regime
(section 127(4)(a) of the Australian Securities and Investments
Commission Act 2001). It is not targeted at the disclosure of personal
information, but is instead intended to authorise disclosure of information
about energy businesses to ASIC (to the extent that the information would
assist ASIC to regulate those businesses), and retail tariff and price
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Prohibited conduct notices and recommendations
information to the Australian Bureau of Statistics (to the extent that the
information would assist the Bureau in the performance of its functions),
CSIRO (to the extent that the information is relevant to the National
Energy Analytics Research Program) and other agencies with
responsibility for energy policy, as appropriate. The breadth of the bodies
to whom information may be disclosed is balanced by the AER's
discretion to disclose only in circumstances where it is satisfied that the
agency has a need for it, and its power to make the disclosure conditional
(which could include a condition that the information is not further
disclosed, or is only disclosed in an aggregated way).
Power to make legislative instruments
7.20 Commonwealth functions can be conferred on the AER under
regulations made for section 44AH(b) of the CCA. New section 44AH(2)
clarifies that these functions can include a function of making legislative
instruments, including for the purposes of an industry code. [Schedule 2,
item 1 and 2, subsections 44AH(1) and (2)]
7.21 The default position is that legislative instruments made by the
AER are non-disallowable. However, the regulation conferring the
instrument making power can provide that the instrument is disallowable.
[Schedule 2, item 2, subsections 44AH(3) and (4)]
7.22 This is consistent with the position that would apply in any
event under section 44(1) of the Legislation Act 2003 (at least to the
extent that the AER is an intergovernmental body within the meaning of
that section, on account of it consisting of Commonwealth and
State/Territory members and being established in accordance with an
intergovernmental agreement (the Australian Energy Market Agreement)
for the purposes of furthering an intergovernmental scheme (the national
energy laws)). In particular, section 44(1) provides that section 42 of the
Legislation Act 2003 does not apply in relation to a legislative instrument,
or a provision of a legislative instrument, if the enabling legislation for the
instrument (in this case, the regulation conferring the instrument-making
power):
(a) facilitates the establishment or operation of an
intergovernmental body or scheme involving the
Commonwealth and one or more States; and
(b) authorises the instrument to be made by the body or for
the purposes of the body or scheme, unless the instrument
is a regulation, or the enabling legislation or some other
Act has the effect that the instrument is disallowable.
7.23 The Electricity Retail Code of Conduct set out in Part 2 of the
Competition and Consumer (Industry Code - Electricity Retail)
Regulations 2019 provides, amongst other things, that a retailer's standing
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
offer prices cannot exceed the amount determined by the AER. Part 3 of
the Regulations confers on the AER the function of determining these
amounts. Section 16(5) of the Regulations provides that these
determinations are disallowable. Following the commencement of
section 44AH(3) (and section 51AE(3), discussed below), section 16(5) of
the Regulations will be repealed, with the result that the AER
determinations will be non-disallowable. The determinations will remain
freely and easily accessible to the public on the Federal Register of
Legislation.
7.24 The AER must have regard to a range of factors when making
these determinations, including the principle that an electricity retailer
should be able to make a reasonable profit. This type of function is most
suited to an independent economic regulator, and it is therefore
appropriate that the determinations are non-disallowable
Incorporation of AER instruments in retail electricity industry code
7.25 Section 14(2) of the Legislation Act 2003 prevents the
Electricity Retail Code of Conduct from incorporating a non-disallowable
legislative instrument made by the AER as in force or existing from time
to time. New section 51AE(3) overrides section 14(2) in relation to AER
determinations made under the Competition and Consumer (Industry
Code - Electricity Retail) Regulations 2019. As a consequence, the
Electricity Retail Code of Conduct will be able to incorporate non-
disallowable AER determinations as in force from time to time. [Schedule 2,
item 6, subsections 51AE(3) and (4)]
Consequential amendments
7.26 Consequential amendments are made to section 79A(1) of the
CCA, to facilitate the enforcement and recovery of any fine imposed for
an offence against section 44AAFA, and section 163(5), to facilitate the
prosecution of such offences. [Schedule 2, items 7 to 9, subparagraph 79A(1)(a)(i),
paragraph 79A(1)(d) and subsection 163(5)]
80
Chapter 8
Regulation impact statement
Background and context
8.1 On 27 March 2017, the then Treasurer directed the Australian
Competition and Consumer Commission (ACCC) to hold an inquiry into
the supply of retail electricity and the competitiveness of retail electricity
prices in the National Electricity Market (NEM) (the Retail Electricity
Pricing Inquiry, or REPI). This inquiry was in response to electricity
affordability becoming a significant issue for households and small
businesses.
8.2 The ACCC delivered the REPI Final Report to Government on
29 June 2018.1 The ACCC found that the average residential customer bill
has increased by more than 35 per cent in real terms over the past 10
years, with average residential electricity prices (expressed as cents per
kilowatt hour) increasing by 56 per cent in real terms over the same
period. The ACCC also found that small businesses had experienced
similar increases in the past decade.
8.3 The report found that there are a number of causes of higher
prices, and made 56 recommendations spanning the entire electricity
supply chain, focussing on the objectives of boosting competition,
lowering electricity costs, and improving experiences for consumers and
businesses. The ACCC reported that, when taken alongside falls in
wholesale prices and flattening or declining network charges, the
recommendations could achieve substantial savings for retail consumers.
Background on the electricity supply chain
8.4 The following concepts are relevant throughout this document:
• The electricity wholesale market (spot market): In the
electricity wholesale market, electricity generators make
capacity available for purchase by retailers and, in some
cases, large end users.
• Electricity networks: Electricity networks consist of
regulated infrastructure which enables the transmission and
distribution of electricity from generators to consumers.
1
The ACCC's Final Report is available at: https://www.accc.gov.au/publications/restoring-
electricity-affordability-australias-competitive-advantage
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• The electricity contract market: The electricity contract
market consists of financial contracts which are designed to
assist generators and retailers in managing the risk of price
volatility on the electricity spot market by effectively
allowing them to fix electricity prices for a set period (for
example, by providing for compensation to be paid where the
wholesale spot price is higher than the price set in the
contract).
• The electricity retail market: In the electricity retail market,
electricity retailers sell electricity to residential and small
business consumers. Retailers purchase electricity directly
from the wholesale market, and enter into electricity
contracts to manage their exposure to wholesale market price
volatility. Retail consumers pay prices set by their retailer
under a range of 'market offers' (competitively priced offers
which often include discounts) or 'standing offers' (for
consumers who do not actively choose a market offer).
Increases and decreases in wholesale spot prices, network
charges, contracting prices and other supply chain costs can
ultimately flow through to retail consumers.
• Gentailer: A colloquial term for a vertically-integrated entity
which operates in both the wholesale market (as a generator)
and in the retail market (as a retailer).
The problem
8.5 The problem is that electricity market participants can engage in
conduct which may be harmful to consumers by detracting from the
efficient and competitive operation of the electricity market, but which is
not prohibited by the existing prohibitions in the Competition and
Consumer Act 2010. The problems, as identified by the ACCC in its REPI
Final Report, broadly relate to the possibility of taking advantage of
confused and disengaged consumers, contract market illiquidity, and
conduct which undermines the effective operation of the wholesale
market.
8.6 On 20 August 2018 the Treasurer tasked the ACCC with an
ongoing Electricity Price Monitoring Inquiry (EPM Inquiry), to run from
2018 to 2025.2 The EPM Inquiry is intended to ensure consumers receive
the benefit of any reduced supply chain costs, and ensure that electricity
markets are operating competitively and efficiently, to the benefit of
2
A joint media release by the then Prime Minister, Treasurer and Energy Minister is available
at: http://sjm.ministers.treasury.gov.au/media-release/089-2018/
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Regulation impact statement
consumers. The terms of reference specifically require the ACCC to
monitor and report on three issues the ACCC identified through its REPI
in relation to electricity retail, contract and wholesale markets.
Retail electricity markets
8.7 The ACCC found that retail electricity pricing structures are
confusing to consumers, and discounting practices make it difficult for
consumers to compare offers across the market. The ACCC found that
retailers' behaviour has led to poor consumer outcomes, in particular:
Electricity retailers' discounting practices are a deliberate
tactic to give the impression that an offer is significantly
cheaper than other offers in the market when this is often not
the case. This behaviour is confusing, at times misleading,
and leads to poor consumer outcomes.3
8.8 As part of this practice, consumers who shop around are
rewarded with greater discounts (which in some cases operate as a form of
late payment penalty for consumers unable to satisfy the attached
conditions) while less active consumers are left on excessively-priced
standing offers.
8.9 On electricity retail price competition, the ACCC found:
Retailers' confusing discounting practices indicate a lack of
effective competition ... Discount offers are presently complex
and difficult to compare, which enables retailers to compete
less aggressively on price.4
8.10 In the absence of effective competition, moderations in
wholesale prices create an opportunity for retailers to profit at the expense
of consumers by retaining supply chain cost savings rather than passing
those savings on to consumers.
8.11 A hypothetical example to illustrate the problem is where:
• a retailer's costs fall substantially due to a significant and
sustained decrease in wholesale costs (i.e. the costs of
acquiring electricity from the spot market as well as longer-
term costs such as contracting to manage exposure to spot
price variation); and
• the retailer fails to reduce their prices to reflect the reduced
supply chain costs, leaving its consumers on higher-priced
offers.
3
ACCC REPI Final Report, page 253.
4
ACCC REPI Final Report, page 264.
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8.12 Ordinarily, in a market characterised by effective competitive
constraint and price competition, a retailer would be unable to engage in
such conduct. This is because one retailer cannot be certain that its
competitors will not reduce their prices, and thereby win customers from
the first retailer. However, in electricity retail markets, it is possible for
retailers to take advantage of consumers' confusion and disengagement
and their resulting difficulty in identifying and switching to better deals.
8.13 Electricity retail markets have a number of somewhat unique
characteristics, which result in consumers' lower levels of responsiveness
to price shifts relative to that observed in other markets. These
characteristics can be illustrated by comparison to the petrol market:
• Regularity of consumer engagement:
- Consumers generally select a retail electricity offer no
more than once a year (at best) and in some cases may
only select an offer when they move house.
- Consumers purchase petrol on a much more regular basis
and can more readily identify shifts in prices.
• Triggers for consumer engagement:
- Electricity consumers lack regular 'triggers' to select
another offer, as retail electricity contracts are often for 12
months and consumers' electricity supply continues after
the contract expires and the benefits under that contract
are lost.
- Consumers often purchase petrol on a weekly basis and
are forced to purchase more petrol to continue using their
vehicles.
• Information asymmetry and comparability:
- Electricity prices can be difficult to understand and
compare, as they consist of both a supply charge and a
tariff and may include other variables (such as peak and
off-peak tariffs).
- Petrol prices are prominently displayed outside petrol
stations and are expressed in a simple, readily comparable
figure of dollars and cents per litre.
• Industry transition:
- The electricity sector is in a period of significant
structural change, with factors such as the greater
prominence of intermittent generation technology, the
progressive ageing and retirement of the existing
generation fleet, improvements in technology (such as
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Regulation impact statement
smart meters) and greater access to information (such as
through the consumer data right).
- The petrol sector is relatively static by comparison.
8.14 As part of the EPM Inquiry, the ACCC is undertaking ongoing
monitoring of electricity prices faced by customers, including both the
level and spread of price offers, analysing how wholesale prices are
influencing retail prices and whether any wholesale cost savings are being
passed through to retail customers.
Electricity contract markets
8.15 Electricity financial contracts are important for effective risk
management, as they allow a retailer to set a fixed rate over a specified
period, and thereby hedge against the risk of spot market volatility. This,
in turn, is critical for confidently operating in the retail market. The
ACCC found that a lack of electricity contract liquidity, in part related to
vertical integration between electricity generators and retailers, has the
potential to become a barrier to entry and expansion for some electricity
retailers. The ACCC found that:
In certain regions of the NEM, particularly South Australia,
the level of liquidity and the advantages enjoyed by vertically
integrated retailers make it difficult for new entrants and
smaller retailers to compete effectively in the retail market.5
Without sufficient competitive pressure in wholesale and
retail markets, these vertically integrated players may have
the ability and incentive to withhold contracts from rival
retailers, or to discriminate against them regarding price.6
8.16 A lack of liquidity in electricity contract markets limits the
ability for new electricity retailers to enter the market and compete to win
customers with better deals. A hypothetical example to illustrate how
contracting behaviour (or rather, a lack thereof) can be used for anti-
competitive purposes is where:
• Gentailer A, an incumbent generator and retailer, typically
offers contracts directly with Retailers A, B and C,
standalone retailers with no generation assets of their own;
• Retailer B becomes a significant competitive threat to
Gentailer A at the retail level;
5
ACCC REPI Final Report, page ix.
6
ACCC REPI Final Report, page 114.
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• Gentailer A then refuses to contract with Retailer B, for the
purpose of ensuring Retailer B is unable to manage its risk
and becomes unviable, removing the competitive threat from
the retail market and thereby substantially lessening
competition.
8.17 As part of the EPM Inquiry, the ACCC is undertaking ongoing
monitoring of contract market liquidity, including assessing whether
vertically integrated electricity suppliers are restricting competition and
new entry.
Wholesale electricity markets
8.18 The ACCC found that there is a general lack of competitive
constraint in wholesale electricity markets. Where behaviour interferes
with competitive processes in wholesale electricity markets, increased
prices flow through the supply chain to consumers. While the ACCC
considered that clear instances of manipulation are not a major feature in
the market today,7 it also reported that:
This lack of competitive pressure is of concern to the ACCC,
particularly given the critical need for a sufficient level of
competition in [the wholesale] market to drive affordable
electricity prices.8
8.19 The ACCC went on to recommend a rule against market
manipulation (behaviour which has the effect of manipulating the proper
functioning of the wholesale market), together with powers to prevent
businesses from exploiting cross-market positions.9
8.20 While there is a broad scope of conduct which may have the
effect of manipulating the proper functioning of the electricity wholesale
market, a hypothetical example of such behaviour is where:
• a generator schedules discretionary maintenance on a large
power plant to occur during a peak period, to cause a spike in
wholesale prices and thereby increase the revenue the
generator makes through its other plants.
8.21 As part of the EPM Inquiry, the ACCC is undertaking ongoing
monitoring of wholesale market prices, including the contributing factors
to these such as input costs, bidding behaviour and any other relevant
factors.
7
ACCC REPI Final Report, page 96.
8
ACCC REPI Final Report, page 87.
9
ACCC REPI Final Report, page 96.
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Regulation impact statement
Interaction with existing legislation
8.22 There are existing prohibitions and remedies in the Competition
and Consumer Act 2010 (CCA), designed to ensure competitive markets
and protect consumers, such as the misuse of market power provision
(section 46), a prohibition on exclusive dealing (section 47) and a
prohibition on misleading or deceptive conduct (section 18 of the
Australian Consumer Law).
8.23 However, the issues described above are somewhat unique to the
electricity sector and may fall outside the scope of the existing broad
prohibitions. For example, section 46 does not prevent a retailer failing to
reasonably pass through supply chain cost savings, as this does not have
the purpose, effect or likely effect of substantially lessening competition.
Other existing prohibitions are similarly not adapted to the unique
situation in electricity markets.
8.24 Further, there are currently no specific remedies tailored to the
electricity sector that could be applied if the ACCC's ongoing monitoring
identifies issues in these areas. There is a risk that, unless action is taken,
the electricity market might not operate as competitively and efficiently as
it could to deliver the best price outcomes for consumers.
Interaction with other Government policies
8.25 The Government has introduced a number of other policies
designed to address electricity affordability, secure good outcomes for
consumers, and promote well-functioning electricity markets. For
example:
• the default market offer, which was recommended by the
ACCC and commenced on 1 July 2019, is intended to reduce
the highest retail electricity prices, limiting retailers' ability
to exploit their most disengaged consumers;
• the reference bill, which was recommended by the ACCC
and commenced on 1 July 2019, is intended to establish a
common benchmark against which all retail offers and
discounts can be compared, providing consumers with
greater transparency around retail offers and improving their
ability to identify the best deal; and
• the Consumer Data Right is intended to give consumers
greater control over their own data and assist consumers to
identify and negotiate better deals.
8.26 These policies are designed to improve transparency in the retail
market and better inform consumers, so that they may select the best deal
from amongst retail offers. However, on their own, they do not guarantee
that those retail offers reflect shifts in retailers' underlying costs.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Case for government action / Objective of reform
8.27 Government action is necessary because, as discussed above, the
current prohibitions and remedies available in the Competition and
Consumer Act 2010 are not well adapted to the somewhat unique issues
that could arise in electricity retail, contract and wholesale markets.
8.28 In relation to retail electricity markets, there is a risk that
electricity retailers retain the savings from any reduced-supply chain costs
as profits, rather than pass those on to consumers. In other markets where
there is effective retail competition, retailers place competitive pressure on
each other to pass on cost savings to consumers, because consumers are
engaged and dissatisfied consumers will likely move to a competitor
which is offering a lower price. In those markets, there is no need to
prohibit a failure to reasonably pass on cost savings. However, in
electricity retail markets, retailers may be able to take advantage of
consumers' confusion and disengagement. In the absence of government
action, retailers may not have a strong enough incentive to offer
consumers better deals in response to supply chain cost savings.
8.29 In relation to electricity contract markets, behaviour which
limits contract liquidity can act as a barrier to entry in retail electricity
markets. This is because, without sufficient access to electricity financial
contracts (such as caps, swaps or power purchase agreements), standalone
retailers without generation assets are over-exposed to wholesale spot
market volatility. This barrier to entry can undermine effective
competition at the retail level, as new retailers may face difficulty
entering, or not be on a level playing field with incumbents. Ultimately,
ineffective competition at the retail level is detrimental to consumers.
8.30 In relation to wholesale electricity markets, generators may
engage in certain bidding and non-bidding conduct which can undermine
effective competition in the wholesale market and distort or manipulate
prices, which increases supply chain costs at the expense of consumers.
8.31 This measure therefore has a twofold objective:
• Firstly, to ensure that electricity retail, contract and wholesale
markets are operating competitively, efficiently and to the
benefit of consumers; and
• Secondly, to ensure that consumers realise the benefits of
reduced supply chain costs, resulting from more effective
competition, policy reform and other factors.
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Regulation impact statement
Policy options
8.32 Three options were considered to ensure well-functioning and
competitive electricity retail, contract and wholesale markets and to
ensure electricity consumers see the benefits of reduced supply chain
costs.
Option 1: Status quo, implementing REPI recommendations
8.33 The first option is no action (i.e. maintain the status quo). This
option, like options 2 and 3, would involve the implementation of some or
all of the REPI recommendations. REPI recommendations which have
been agreed and, in some cases, implemented by the Government include:
• implementing a cap on the market share of generators, which
would prevent further acquisition beyond the cap but permit
investment in new capacity (recommendation 1);
• a default market offer, regulated by the Australian Energy
Regulator (AER), to replace standing offers
(recommendation 30);
• using the default market offer as a reference point for all
advertised discounts (recommendation 32);
• placing limits on the size of conditional discounts
(recommendation 33); and
• establishing a mandatory code of conduct for energy
comparator websites (recommendation 34).
8.34 However, under this option there would be no ongoing
monitoring of whether electricity retail, contract and wholesale markets
are operating competitively and efficiently and no ability to quickly
respond to any issues identified. Therefore, this option would not ensure
that consumers receive the benefits of any reductions in electricity supply
chain costs.
Option 2: Electricity Price Monitoring Inquiry without remedies and
sanctions
8.35 The second option is that the ACCC undertake an EPM Inquiry
without remedies or sanctions to address any misconduct identified by the
ACCC. This is in addition to the implementation of some or all of the
REPI recommendations (option 1).
8.36 Under this option, the ACCC would undertake ongoing
monitoring of electricity retail, contract and wholesale markets, and would
provide regular reports on its findings.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
8.37 Where the ACCC identifies unacceptable behaviour, such as a
failure to pass through substantial supply chain savings to consumers or
behaviour designed to hinder effective competition, the ACCC could
publicly report on this conduct and make recommendations for
government consideration.
8.38 However, under this option there would be no mechanism
available to immediately take action against unacceptable conduct. This
means that identified harm to consumers or to the competitive process
may be able to persist (and potentially worsen) while the Government
considers and implements any recommendations made by the ACCC.
Option 3: Electricity price monitoring with remedies and sanctions
8.39 The third option is to make available a graduated range of
remedies and sanctions to address any misconduct identified by the
ACCC. This is in addition to the implementation of some or all of the
REPI recommendations (option 1) and the ACCC undertaking an ongoing
EPM Inquiry (option 2).
8.40 Unlike option 2, this option includes a legislative framework
prescribing prohibited conduct, setting out the applicable remedies and
sanctions, and providing processes for applying the remedies and
sanctions. The legislation would sunset at the end of 2025, unless a review
determines that it should continue to operate beyond 2025.
8.41 Under this option, at any point during the ongoing electricity
price monitoring inquiry, the ACCC or the Government would be able to
take action when it identifies a corporation engaging in prohibited
conduct.
Prohibited conduct:
8.42 Under this option, the legislation will prescribe prohibited
conduct in a three-limb provision corresponding to the three limbs of the
ACCC's ongoing EPM Inquiry. The prohibition is intended to target
behaviour by electricity corporations which is detrimental to competition
and/or to consumers.
• The retail pricing limb is targeted toward conduct by retailers
that take unfair advantage of consumers' confusion around
retail electricity offers and their difficulty in identifying and
switching to better deals, by failing to reasonably pass
through supply chain cost savings to consumers on market
offers. This limb would attract the ACCC-imposed remedies
(public warning notice, infringement notice) or an ACCC
application to the Court for civil penalties. Contracting orders
(Treasurer-ordered) and divestiture orders (Court-ordered)
would not be available for a breach of this limb.
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Regulation impact statement
• The contract liquidity limb is targeted toward conduct
whereby a generator refuses to offer electricity financial
contracts to a rival at the retail level for anti-competitive
purposes. This limb would attract the ACCC-imposed
remedies, Court-ordered civil penalties, or a Treasurer-issued
contracting order. Court-ordered divestiture would not be
available for this limb.
• The wholesale bids and conduct limb is targeted toward
bidding and non-bidding conduct by generators, which is
anti-competitive or manipulative and can lead to an increase
in prices which flows through to consumers. This limb would
attract the full suite of remedies detailed below. Contracting
orders and divestiture orders would only be available for a
breach of the aggravated case of this limb, not for the basic
case.
Remedies and sanctions:
8.43 Where the ACCC identifies prohibited conduct, the following
remedies and sanctions would be available, where appropriate with
reference to applicable legislated criteria (which are detailed below).
1) A public warning notice issued by the ACCC.
8.44 Upon identifying prohibited conduct, the ACCC will be able to
issue a public warning notice.
2) An infringement notice issued by the ACCC.
8.45 Upon identifying prohibited conduct, the ACCC will be able to
issue an immediate infringement notice which includes a penalty amount.
Infringement notices are used by the ACCC as an enforcement tool in a
number of other contexts.
3) Court-ordered civil penalties on application to the Court by the ACCC.
8.46 Upon identifying prohibited conduct, the ACCC will be able to
apply to the Court for a civil penalty order. Civil penalties would be in
line with those available for other breaches of the competition law, and
significantly higher than the penalties available under an infringement
notice.
4) Treasurer-issued price cap orders.
8.47 An additional remedy which was previously considered was to
impose a price cap on a retailer's market offers for a specified period. The
Government has since implemented a default market offer, which from 1
July 2019 caps the price of standing offers in non-price regulated
jurisdictions (with the exception of Victoria, noting the Victorian
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
Government has implemented a similar regulation). A price cap remedy
has not been implemented in this legislation.
5) Treasurer-issued contracting orders.
8.48 Upon identifying prohibited conduct in relation to either the
contract l limb or the wholesale bids and conduct limb, the ACCC will be
able to initiate a notice and response process with the corporation.
Following this process, the ACCC could make a recommendation to the
Treasurer that would allow the Treasurer to make an order that the
corporation offer electricity financial contracts to unrelated parties.
8.49 The order will need to specify details such as:
• the amount of generation capacity the offers must relate to;
• a requirement that offers be made on commercial terms (to
prevent corporations seeking to circumvent the order by
making offers on terms that are unlikely to be accepted);
• the period(s) over which offers must be made; and
• any other details necessary to give effect to the order.
8.50 This remedy is essentially a form of structural separation, as it
aims to ensure vertically integrated entities are making contracts available
to third parties rather than solely (or primarily) using them internally.
6) Court-ordered divestiture on an application by the Treasurer.
8.51 Upon identifying an aggravated case of misconduct in the
wholesale market, the ACCC will be able to initiate a notice and response
process with the corporation. Following this process, the ACCC could
make a recommendation to the Treasurer that would allow the Treasurer
to apply to the Court for an order that a corporation divest some or all of
its assets. In determining whether to accept the ACCC's recommendation
and make an application to the Court, the Treasurer would need to
consider not only that the remedy is proportionate and targeted, but also
that the public benefit of the order would outweigh any public detriment.
8.52 In its REPI Final Report, the ACCC considered divestiture as a
mechanism for reducing market concentration (rather than in response to
particular prohibited conduct) and did not support it, arguing that its other
recommendations would sufficiently address the conduct it identified.
8.53 However, the Government considers that divestiture is needed as
an additional remedy, to deter corporations from engaging in particularly
egregious prohibited conduct. It is intended that divestiture orders would
only be sought as a last resort, and subject to a court finding a corporation
has breached the aggravated wholesale conduct prohibition. The
divestiture order power is a significant deterrent, and it may never become
necessary to seek such an order.
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Regulation impact statement
Contracting orders and divestiture orders - legislative criteria
8.54 Treasurer-issued contracting orders and Court-ordered
divestiture orders are subject to a requirement that the chosen remedy
must be a proportional means of preventing the corporation from engaging
in that conduct in future. This is designed to ensure that the remedies
cannot be applied where this would be disproportionate and a lesser
remedy would be as effective in preventing the conduct from re-occurring.
8.55 In relation to divestiture orders, there is an additional legislative
test to be met by the ACCC (in making a recommendation to the
Treasurer) and the Treasurer (in determining whether to make an
application to the Court), whereby the actual or likely public benefit of a
divestiture must outweigh any actual or likely detriment.
8.56 Public benefit is a broad concept, encompassing benefits to the
market (e.g. increased competition, for example where an asset can be
sold to assist a new market entrant), and to consumers (e.g. lower prices
which may flow from increased competition), among other potential
benefits.
8.57 Similarly, public detriment is also a broad concept,
encompassing detriment to the market (e.g. any investor uncertainty) as
well as any detriment to consumers (e.g. where a divestiture would be
detrimental to system reliability, or might lead to increased prices in the
longer term) among other potential detriments.
8.58 The public benefit and detriment of a particular divestiture
would need to be weighed on a case-by-case basis with reference to the
specific circumstances. These concepts are further explored in section 4.
8.59 In determining whether to make a divestiture order, the Court is
also subject to the test of proportionality.
Notice and response process for Treasurer-issued remedies
8.60 For more serious conduct, where the ACCC considers a
contracting or divestiture order is warranted, this option provides for the
ACCC to engage with the corporation to resolve the issue before making a
recommendation to the Treasurer.
8.61 This would involve the ACCC issuing a notice to the
corporation, stating that the ACCC considers the corporation has engaged
in prohibited conduct, and giving the corporation an opportunity to
provide a response explaining its conduct or detailing how it will remedy
its conduct, as well as an opportunity for the corporation to comment on
the recommendation under consideration.
8.62 The ACCC will then have a period to consider the corporation's
response, and will give a notice to the Treasurer either recommending the
Treasurer take action (either that the Treasurer make a contracting order,
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
or apply to the Court for a divestiture order), or stating that no action is
recommended.
8.63 The Treasurer will then have a period to consider the ACCC's
notice. Where the ACCC recommends that no action be taken, the
Treasurer will take no action. Where the ACCC recommends a remedy,
the Treasurer will be required to consider whether the relevant tests are
met (including proportionality, and an additional public benefit test for
divestiture) before determining whether or not to accept the ACCC's
recommendation.
8.64 If the ACCC recommends that the Treasurer seek a Court-
ordered divestiture order, and the Treasurer considers all relevant tests are
met, the Treasurer will then apply to the Federal Court seeking that a
divestiture order be made.
Cost benefit analysis of each option / Impact analysis
8.65 This section discusses the expected impact of each policy
option. Each of the three policy options is likely to have some impact on
electricity corporations (retailers and generators, some of which are
vertically integrated as 'gentailers') and electricity consumers.
Option 1: Maintain the Status Quo, implementing REPI recommendations
8.66 Option 1 is the implementation of some or all of the REPI
recommendations with no additional action. REPI recommendations
which have been accepted by the Government are detailed in section 3.
8.67 The REPI made a number of recommendations related to
electricity retail, contract and wholesale markets, which are expected to be
beneficial in terms of promoting more effective competition and reducing
supply chain costs. The ACCC reported that electricity consumers, in
particular residential consumers and small businesses, could see
substantial savings as a result of the implementation of its
recommendations.
8.68 Each of options 1, 2 and 3 should carry these benefits to
electricity consumers in the form of lower prices, and to electricity
markets in the form of increased competition. In their submissions to the
consultation paper, some stakeholders suggested the Government should
focus on progressing the ACCC recommendations as these would do more
to promote competition and address the causes of high prices.
8.69 However, the ACCC's estimated savings and other benefits will
only eventuate if electricity corporations' behaviour supports effective
competition, and if retailers choose to pass through those savings. Under
this option, there is no ongoing monitoring of conduct and no guarantee of
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Regulation impact statement
retailers passing through any supply chain cost savings, resulting from
increased competition, policy reforms and other factors, to consumers.
8.70 This option would impose no additional regulatory costs on
electricity corporations, other than those being considered and dealt with
separately as part of the implementation of individual REPI
recommendations.
Option 2: Electricity price monitoring without remedies and sanctions
8.71 Option 2 is the implementation of some or all of the REPI
recommendations (option 1), with an ongoing EPM Inquiry, but without
remedies or sanctions available to address any misconduct identified by
the ACCC.
8.72 The option has the added benefit of shining a light on the
behaviour of participants in electricity retail, contract and wholesale
markets. Electricity corporations would know that their behaviour is under
constant monitoring between 2018 and 2025, with the prospect of the
ACCC publicly reporting on any behaviour which is not in the interests of
effective competition or which contributes to poor outcomes for electricity
consumers. In and of itself, this monitoring and reporting may prompt a
positive behavioural change by electricity corporations.
8.73 Similarly, where the ACCC publishes reports identifying
unacceptable behaviour by particular corporations or data about the
relative prices offered by retailers, this could theoretically prompt
consumers to seek and switch to a better deal. Over time, this could
provide sufficient competitive pressure for electricity companies to
behave in a way that is pro-competitive and in the interests of their
consumers. However, as discussed in section 1, the electricity market
faces a somewhat unique problem in that there is a sub-set of consumers
who are disengaged from the market and are not responsive to changes in
price. It is likely that these consumers would continue to stay on an
unfavourable offer, even if the ACCC makes a publication that the
particular offer is excessively high relative to other offers in the market.
This option therefore has the potential to exacerbate the problem of
'winners and losers' amongst retail electricity customers.
8.74 Further, where the ACCC identifies unacceptable behaviour, it
would have no immediate enforcement tools available to address the
conduct beyond 'naming and shaming' in its reports and making
recommendations for Government consideration. Such recommendations
may take months, or even years, to implement depending on their nature.
As electricity companies would be aware of the ACCC's lack of
enforcement tools, they would have little incentive to take immediate
steps to remedy their conduct, and are likely to wait for the Government to
action recommendations made in the ACCC's six-monthly reports. This
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may mean that behaviour which hinders effective competition, or is
detrimental to electricity consumers, could persist or even worsen over
time. The lack of enforcement tools is therefore considered a significant
hindrance to the effectiveness of the EPM Inquiry.
Option 2: Regulatory burden costings:
8.75 This option is expected to carry regulatory compliance costs,
insofar as the ACCC issues information-gathering notices under section
95ZK of the Competition and Consumer Act 2010 to electricity
corporations. It is expected that compliance with such notices will cost
businesses approximately $420,000 per year over ten years. This figure is
based on the following assumptions, based on the REPI:
• The ACCC is assumed to issue approximately 80
information-gathering notices per year, primarily to
electricity retail and electricity generation businesses. Over
the course of the REPI, the ACCC issued over 110 notices
over 15 months.10
• It is assumed that it will take an average of approximately
110 hours to comply with each notice, noting that it may take
more or less time to comply depending on the precise
requirements of the notice.
8.76 The REPI was a very recent and comprehensive examination of
the electricity supply chain, and it is expected that the EPM Inquiry may
not need to cover precisely the same ground. These estimated regulatory
costs therefore represent an upper estimate.
Table 8.1 Regulatory burden estimate table - Option 2
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total change
costs organisations in costs
($ million)
Total, by $0.42m $0 $0 $0.42m
sector
Option 3: Electricity price monitoring with remedies and sanctions
8.77 Option 3 is the implementation of some or all of the REPI
recommendations (option 1), with an ongoing EPM Inquiry (option 2),
10
ACCC REPI Final Report, page 357.
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Regulation impact statement
with remedies or sanctions available to address any misconduct identified
by the ACCC.
8.78 In addition to the benefits detailed under options 1 and 2, this
option has the added benefit of providing the ACCC and the Government
with a graduated range of enforcement tools and a procedure for taking
more immediate action against conduct which breaches a new set of
prohibitions tailored to the electricity retail, contract and wholesale
markets.
8.79 Two elements of the legislative framework, the prohibitions and
the remedies, are expected to carry significant non-regulatory costs and
benefits. These costs and benefits are expected to occur across electricity
markets, with few geographical differences, except as detailed below.
The prohibitions
8.80 While there is a degree of overlap with existing prohibitions, the
prohibitions considered are new and specific to the regulatory framework
for the electricity sector.
8.81 In their submissions to the consultation paper, many
stakeholders noted the importance of ensuring the prohibitions recognise
the somewhat unique design and operation of electricity markets. They
noted that improperly designed prohibitions could have unintended
consequences, such as interfering with retailers' risk management
strategies and risking their viability, or exposing consumers to price
volatility which retailers would otherwise seek to smooth out.
8.82 Noting these stakeholder concerns, the prohibitions have been
carefully designed to strike an appropriate balance between capturing
unacceptable conduct and not over-capturing legitimate conduct. The
explanatory memorandum provides detailed guidance on the intended
scope of the prohibitions.
8.83 The retail price limb has been designed to require that
sustained and substantial supply chain cost savings are reasonably passed
through to consumers on market offers. Retailers' submissions questioned
this limb, and suggested that this prohibition would amount to price
regulation and cause risks to their viability. However, this limb does not
require retailers to immediately pass through savings in response to small
or short-term price fluctuations, as this would expose consumers to price
volatility. Retailers would only be required to make adjustments in
response to substantial changes in underlying electricity costs which occur
over a sustained period.
8.84 Similarly, it does not presume a 'one size fits all' approach,
noting that different retailers will be in different positions and therefore it
will not necessarily be reasonable to require all retailers to reduce their
prices by the same amount in response to a particular change in
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
conditions. For example, it would be open to a retailer to argue that it is
not reasonable to pass through wholesale cost savings if their overall costs
of supply had remained the same, or had increased (for example due to
contracting to manage risk).
8.85 The main point is that retailers are required to reasonably pass
through any supply chain savings, and this allows a case-by-case, holistic
assessment by the ACCC of what is reasonable in the given
circumstances. To the extent that retailers reduce their prices, consumers
will benefit.
8.86 The contract liquidity limb has been designed to capture
unreasonable refusals to contract, where this is done with the purpose of
substantially lessening competition. It is not intended to interfere with
efficient risk management strategies by electricity corporations (including
gentailers). It does not require the cancellation of any contracts which are
on foot, nor does it require electricity corporations to fundamentally
change their contracting behaviour, unless their current contracting
behaviour has the purpose of substantially lessening competition. The
limb has a narrow focus on contracting behaviour which has the purpose
of substantially lessening competition, which acknowledges that while
there may be broader structural issues affecting contract liquidity, they
should be addressed outside of this legislative framework. Contracting
which is a part of a genuine risk management strategy will not breach the
prohibition.
8.87 The Retailer Reliability Obligation ( which commenced on July
2019), contains a form of contracting obligation (the Market Liquidity
Obligation) which can be imposed on gentailers in the event that
reliability obligations are triggered. As businesses adjust for the Retailer
Reliability Obligation, contract liquidity in these States is likely to
improve.
8.88 Finally, the wholesale bids and conduct limb has been
designed to use terms which are familiar to wholesale corporations, and
again has been designed with the operation of the wholesale market in
mind. For example, the NEM wholesale spot market operates in such a
way that transitory market power is acceptable (indeed, it is considered an
efficient signal for new investment). The NEM spot market also allows
generators to bid and rebid at a range of prices to reflect the prevailing
market conditions of supply and demand at a given time. The prohibition
does not seek to prevent these outcomes. Rather, the prohibition seeks to
target conduct which is not a part of genuine commercial operation in the
market, and seeks to distort or manipulate prices. This limb is split into a
basic case, for which contracting orders and divestiture orders are not
available, and an aggravated case, which captures more serious conduct
for which contracting orders and divestiture orders may be a proportionate
response.
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Regulation impact statement
8.89 The ACCC is expected to release guidance about its approach to
enforcing the prohibitions, to increase market participant certainty.
8.90 The Government expects that electricity corporations will be
able to comply with the new prohibitions, as these should reflect the
features of a well-functioning electricity market.
The remedies
8.91 The remedies, as detailed in section 2, range from a public
warning notice issued by the ACCC up to contracting orders and
divestiture. The legislative criteria ensure that the appropriate remedy is
selected, through a series of tests, including that the chosen remedy must
be proportionate (i.e. no more severe than is necessary to address the
prohibited conduct in question). In particular, it is intended that the
Treasurer would apply to the Court for a divestiture order only as a last
resort, and where the public benefit of such action would outweigh any
detriment.
8.92 The remedies are expected to have broader costs and benefits in
two ways. Firstly, through their existence, independently of whether they
are used, and secondly in the event they are used.
Existence of the remedies
8.93 The prospect of tough remedies, such as the contracting order
and in particular the divestiture order, provides a very strong incentive for
electricity corporations to avoid breaching the new prohibitions (i.e. to
behave in a way that does not hinder effective competition, and is not
detrimental to electricity consumers). Given the nature of the remedies, it
is possible that their mere introduction to the electricity sector's regulatory
framework imposes some non-regulatory costs and benefits.
8.94 While some of the remedies available are broadly consistent
with existing enforcement mechanisms available to the ACCC, such as
infringement notices and civil penalties, others are relatively new in their
application as remedies rather than voluntary undertakings. For example,
Court-ordered divestiture orders are available under the CCA as a remedy
for mergers or acquisitions which breach the CCA, and act to unwind the
offending transaction. Outside of the CCA and foreign investment
framework, divestiture is generally not available as a remedy.
8.95 The submissions to the consultation paper generally expressed
concerns that the prospect of contracting orders and divestiture orders as
remedies could be expected to negatively impact investor confidence.
Submissions argued the prospect of remedies of this nature might either:
• add a risk premium to investment, as financiers judge that
investing in the electricity sector carries greater risks than in
the past; or
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• deter future investment, as potential investors may judge that
investment in the electricity sector carries greater risks than
in the past and that returns on investment may be reduced.
8.96 Each of the above would increase costs to consumers.
8.97 It is difficult to quantify the impacts on investment, given much
depends on the nature of the investment (for instance, new build or
refurbishment), its location and prevailing market conditions around that
investment such as price volatility. In some exercises, it is possible to
model the impact on investment through a risk premium which would be
imposed on the weighted average cost of capital for generation
investment.
8.98 It is not possible to reliably estimate or quantify policy
uncertainty for this legislation using such an approach, as there are many
factors at play and significant uncertainty as to how they may play out. It
is possible to assess that the likely impact of introducing contracting
orders and particularly divestiture orders to the regulatory framework
would increase the cost of capital, particularly during the initial
transitional period under the legislation, but this cannot be quantified with
confidence.
8.99 However, with the possibility of introducing additional investor
uncertainty in mind, the legislative framework has been designed to put
sufficiently clear criteria around when and how the remedies can be used.
In particular, divestiture orders may only be made by the Court on the
application of the Treasurer.
8.100 In light of this design, potential investors in the electricity sector
should not be deterred by the legislative framework, unless their intention
is to engage in conduct which is detrimental to competition or consumer
welfare.
8.101 Further, as discussed above, over time corporations will become
more familiar with the legislation and the ACCC's approach to
enforcement.
Use of the remedies
8.102 In the event the remedies are used, they could be expected to
have effects not just on the business which is subject to the order, but on
the broader market. As such, the benefits and costs of sanctions will need
to be carefully considered as part of the decision-making framework.
8.103 In the case of a Court-ordered divestiture order, for example, it
is possible that both the divested and remaining parts of a business could
become less efficient as a result. This is particularly so for vertically
integrated gentailers, which rely on significant internal efficiencies. At
worst, a divestiture order could result in the relevant business becoming
unviable. This would not be in the interests of the market, as it could
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Regulation impact statement
result in fewer competitors, a possible resulting increase in market
concentration, and a lessening of competition. Less efficient businesses, or
fewer businesses in the market, could in turn result in higher prices for
consumers.
8.104 On the other hand, a divestiture order could promote
competition, as it may allow for new market entry or for smaller market
players to expand and promote competitive pressure for all corporations.
8.105 Before the Treasurer may apply to the Court for a divestiture
order, the legislation requires a consideration of the public benefits and
detriments of a divestiture order, such that both the ACCC and the
Treasurer must be satisfied there would be a net public benefit.
8.106 Similarly, a contracting order could have both costs and benefits,
depending on the specific circumstances of the case. For example, it might
be possible for prices to increase if vertically integrated generators enter
into enough hedging contracts that they lose some of the efficiencies of
vertical integration. On the other hand prices could decrease if sufficient
contract liquidity allows more efficient hedging of risk for a wide set of
market participants.
8.107 With this in mind, one factor which must be considered in
making a contracting order is the amount of generation capacity the
relevant corporation holds, and the nature of that capacity. This is
designed to safeguard against requiring a generator to contract to the point
where its own viability becomes questionable. Another factor to be
considered is the generator's commitments to its load of retail customers
(if any). This is to ensure that a contracting order does not undermine a
gentailer's ability to supply its retail customers, or expose those customers
to risk.
8.108 The exact impact on electricity prices in each market segment
will depend on a number of factors, including but not limited to: the
concentration of generation market share in each State, the volume of
hedge contracts sought by retailers and the extent of spot price volatility
over a given period.
8.109 To the extent that a contracting order promotes improved
contract liquidity, it would be expected that States with poorer contract
liquidity would benefit most.
Conclusion
8.110 Except as described above, it is expected that States and
Territories will equally experience the costs and benefits detailed in this
section.
8.111 With these costs and benefits in mind, the legislative framework
has been designed so as to:
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
• carefully prescribe prohibited conduct, so that electricity
companies can operate in the market with certainty as to
when their conduct will or will not attract the remedies;
• provide a notice and response process for the tougher
remedies, giving the corporation an opportunity to resolve
the issue with the ACCC and avoid the application of those
remedies;
• explicitly link the tougher remedies to the types of breaches
they are best adapted to address; and
• subject the tougher remedies to a series of criteria to ensure
they are only available where appropriate, for the most
egregious conduct.
Option 3: Regulatory burden costings
8.112 Under option 3, electricity corporations will face three sources
of regulatory costs.
8.113 Firstly, electricity retailers and generators will incur the
regulatory costs associated with the EPM Inquiry, as detailed above.
8.114 Secondly, it is expected that electricity retailers and generators
will incur additional legal costs during the initial transitional period, to
educate themselves about the new regime and ensure their business
practices are compliant. Some businesses may also need to make
adjustments to their internal processes, to ensure compliance with the new
legislation. These adjustment costs are not expected to be substantial, as
the legislation is not intended to interfere with ordinary business practices
by electricity businesses (such as good faith bidding behaviour by
electricity generators, and contracting as part of genuine risk management
strategies). The legislation is targeted toward behaviour which is harmful
to competition and detrimental to electricity consumers. In addition, the
legislation will commence six months after Royal Assent. This will give
the ACCC time to develop guidelines that make the ACCC's
interpretation and enforcement approach clear, which will in turn give
corporations greater certainty and guidance around compliance and time
to adjust their business practices if required. Once electricity businesses
have factored the new regime into their existing practices, it is expected
that on average the additional regulatory costs will be minimal.
Corporations operating outside of electricity retail, contract and wholesale
markets will not need to seek legal advice or adjust their business
practices, as the regime is limited to the electricity sector.
8.115 It is estimated that this initial legal advice and once-off
adjustments to internal processes will cost businesses approximately
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Regulation impact statement
$290,000 per year over ten years. This figure is based on the following
assumptions, based on the advice and experience of the ACCC:
• The regime will apply to approximately 90 electricity retail
and generation businesses.
• Of these 90 businesses, 50 are considered larger active
retailers and scheduled generators, to which the legislation is
primarily directed. These businesses are expected to bear the
majority of the regulatory costs associated with the
legislation.
- The costings assume that each of these 50 businesses will
seek an average of 75 hours of legal advice and spend an
average of 225 hours of internal staff time to adjust their
internal practices.
• Of these 90 businesses, 40 are considered smaller entities
(such as smaller wind or solar farm operators) and those
operating outside the National Electricity Market, which fall
within the scope of the legislation, but are not the entities to
which the legislation is primarily directed. These businesses
are expected to bear limited compliance costs.
- The costings assume that each of these 40 businesses will
seek an average of 10 hours of legal advice and spend an
average of 20 hours of internal staff time to adjust their
internal practices, substantially less than those firms to
which the legislation is primarily directed.
• In the above figures, vertically integrated businesses
(gentailers) and other corporate groups are counted once,
generators and retailers operating in multiple States are
counted once.
8.116 Finally, where the ACCC identifies potential prohibited conduct
through its EPM Inquiry, it may issue one or more notices under section
155 of the Competition and Consumer Act 2010 to investigate the
potential contravention. A section 155 notice may require electricity
corporations to provide information, documents or evidence relevant to
the potential contravention. It is expected that, each year, only a small
number of electricity corporations would be issued with such notices.
8.117 It is estimated that responding to section 155 notices will cost
businesses approximately $79,000 per year over ten years. This figure is
based on the following assumptions, based on the advice and experience
of the ACCC:
• The ACCC is assumed to issue section 155 notices in relation
to two matters each year, issuing 5-10 notices per matter (an
average of 15 notices per year). In practice, the ACCC may
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
undertake more or less than two investigations per year,
depending on the extent of electricity businesses'
compliance.
• It is assumed that it will take an average of approximately
110 hours to comply with each section 155 notice, noting that
it may take more or less time to comply depending on the
precise requirements of the notice.
8.118 A number of costs fall outside the scope of the Regulatory
Burden Measurement Framework, and have been excluded from the
regulatory burden costings below:
• Any compliance costs associated with the REPI
recommendations11 are excluded as those recommendations
and any associated compliance costs exist independently of
the legislative framework and those compliance costs are not
imposed by the legislative framework.
• Any compliance costs related to, or flowing from, a
contravention of the prohibitions, such as the costs of
penalties or the costs of seeking judicial or merits review.
These are considered costs of non-compliance.
8.119 Similarly, the broader economic costs and benefits associated
with the legislation have not been quantified. However a detailed
qualitative analysis is provided above in place of costings.
8.120 As the average annual regulatory burden is estimated at less than
$2 million per year, Treasury has self-assessed the costs in the table
below.
8.121 A regulatory offset has not been identified. However, Treasury
is seeking to pursue net reductions in compliance costs and will work with
affected stakeholders and across government to identify regulatory burden
reductions where appropriate.
11
In relation to the REPI recommendations, the ACCC's Final Report was certified in place of
a RIS.
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Regulation impact statement
Table 8.2 Regulatory burden estimate table - Option 3
Average annual regulatory costs (from business as usual)
Change in Business Community Individuals Total
costs organisations change in
($ million) costs
Total, by $0.79m $0 $0 $0.79m
sector
Consultation
8.122 The three issues in relation to electricity retail, contract and
wholesale markets, which form the basis of the ACCC's electricity price
monitoring inquiry and the prohibitions in this legislative framework,
went through extensive consultation processes.
8.123 As part of the REPI, stakeholders had opportunities to make
submissions to both an Issues Paper (31 May 2017) and Preliminary
Report (13 July 2017), as well as provide comments at public forums.
Non-confidential written submissions are available on the ACCC's
website.
8.124 The Government first announced the prohibiting energy market
misconduct regime on 20 August 2018, and the ACCC was formally
tasked with undertaking the EPM Inquiry by the former Treasurer on the
same day.
8.125 In developing the policy underlying the legislative framework,
the following objectives were considered crucial:
• providing a mechanism to ensure effective competition in
electricity retail, contract and wholesale markets;
• providing a mechanism to ensure reduced electricity supply
chain costs, resulting from more effective competition, policy
reforms and other factors are passed on to consumers;
• ensuring the framework does not capture legitimate and
appropriate behaviour by electricity corporations;
• ensuring the availability of effective remedies for prohibited
conduct; and
• allowing for effective compliance monitoring and
enforcement by the ACCC.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
8.126 With this in mind, the policy was developed through targeted
consultation with electricity market participants, ACCC, AER, AEMC,
Energy Security Board and others.
8.127 On 23 October 2018, the Government released a Consultation
Paper containing policy proposals for framing the prohibited conduct, the
graduated range of remedies and enforcement, ACCC engagement with
corporations and recommendations to the Treasurer, and review processes.
8.128 As part of this process, the Government actively sought
submissions from stakeholders representing a wide range of interested
parties, including (in addition to those mentioned above):
• Electricity corporations (both directly and via the Australian
Energy Council);
• The Business Council of Australia; and
• The Law Council of Australia.
8.129 Submissions closed on 7 November 2018. During the
consultation period, 14 submissions were received.
8.130 Submissions generally focused on the merits of the policy, rather
than on the design and workability of the legislation. However, the
submissions raised some important considerations which were taken into
account in finalising the drafting. These related in particular to the
framing of the prohibitions to ensure they provide corporations sufficient
certainty to continue with genuine pricing behaviour, wholesale market
conduct and risk management strategies. Specific comments are discussed
above in section 4.
8.131 The Government announced its objective to introduce the
legislation before the end of 2018. Given this objective, and the fact
consultation has already occurred on the REPI and on the policy design
underlying the legislative framework, the Government conducted a short
and targeted consultation with stakeholders on draft legislation following
the public consultation process. This allowed the Government to identify
remaining issues and refine the final drafting of the legislation.
8.132 A key concern raised by stakeholders was around the proposal
that, as previously drafted, the Treasurer would be able to make a
divestiture order. The Government responded to this concern by providing
that a divestiture order can be made by the Court, on the application of the
Treasurer, and upon the Court both making a finding that there has been a
breach of a prohibition and considering that a divestiture order is a
proportionate response.
8.133 A further concern raised by stakeholders was that some of the
potential remedies may not be appropriate for particular breaches of the
legislation. For example, a divestiture order would likely not be
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Regulation impact statement
considered 'proportionate' or 'targeted' to a breach of the retail pricing
prohibition, and would therefore be unlikely to satisfy the proposed tests
for making an order, but divestiture orders were not explicitly excluded
for such a breach. In response to this concern, the contracting order and
divestiture order were more explicitly linked to particular breaches. The
legislation allows a contracting order for a breach of the contract liquidity
limb or the aggravated wholesale limb, but not for the retail pricing limb
or basic wholesale limb. Similarly, a divestiture order may only be made
for a breach of the aggravated wholesale limb, but not for any other limb.
Reintroduction to Parliament (2019)
8.134 The Bill was introduced to Parliament on 5 December 2018, and
lapsed at dissolution on 11 April 2019. Committed to reintroducing the
Bill in 2019, the Government has undertaken further targeted consultation
on the Bill with key industry stakeholders. The consultation process
included a number of meetings between June and August 2019, with the
Australian Energy Council, AGL, EnergyAustralia, Origin Energy and the
Business Council of Australia.
8.135 Stakeholders suggested a wide range of amendments to the Bill,
including significant amendments such as removing the retail prohibition
entirely, and converting the contracting order from a ministerial order to a
court order. However, such amendments would undermine the policy
objectives of the Bill, by removing direct protection for retail customers
and significantly delaying the application of the contracting order.
8.136 Stakeholders also suggested a number of minor amendments that
focussed on providing additional clarity around some elements of the Bill.
8.137 In response to this further consultation, the Government has
made a number of amendments to the Bill. This included amendments
such as delaying commencement by six months to address issues with
transitional uncertainty, clarifying that the retail pricing prohibition only
applies to market offers, and clarifying that the retail pricing prohibition
does not require a pricing adjustment where this would be in breach of
another Commonwealth, State or Territory law, regulation or rule.
Preferred option
8.138 Of the three options considered, the option that provides the
strongest means for achieving the policy objective (as detailed in section
2) is establishing a legislative framework which reflects the Government's
and community's expectations about acceptable conduct in electricity
retail, contract and wholesale markets. A legislative framework provides a
clear mechanism to address the identified issues in electricity retail,
contract and wholesale markets.
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
8.139 While options 1 and 2 should theoretically promote more
effective competition in electricity retail, contract and wholesale markets,
and lead to lower prices for consumers, those outcomes may not eventuate
under options which lack strong incentives for compliance.
8.140 Option 2 carries lower regulatory costs than option 3. However,
while the ACCC's public reporting of any unacceptable behaviour in
electricity markets may prompt some consumers to move to better deals,
disengaged consumers are unlikely to do so and will be disadvantaged
under this approach. As discussed in other sections of this document, the
electricity market has a number of somewhat unique characteristics, and
many consumers do not respond to pricing changes the way they do in
other sectors. Option 2 does not guarantee that electricity firms will
behave in the interests of their consumers, as it lacks strong incentives for
compliance.
8.141 Option 3 carries the highest regulatory costs, as well as the most
significant non-regulatory costs. However, option 3 also carries the
greatest non-regulatory benefits. Further, the non-regulatory costs under
option 3 are expected to be mitigated through the careful design of the
legislation, and are also expected to be largely transitional. Once the
market gains an understanding of the new legislative framework and
adjusts, it is expected that any fear and uncertainty on the part of
electricity corporations will be significantly reduced, while the benefits to
electricity consumers will be enduring.
8.142 Option 3 carries the greatest net benefit to the community. While
it represents the strongest approach, the level of consumer protection is
considered proportionate to the risks of electricity firms engaging in
conduct which is harmful to competition and detrimental to consumer
welfare (i.e. failing to address electricity affordability, which creates an
impediment to accessing an essential consumer good and
disproportionately affects consumers in financial hardship). In addition,
transitional uncertainty can be more effectively managed during the six
months between Royal Assent and the commencement of the legislation.
Implementation and evaluation
8.143 Once the legislation is in place, implementation will be
undertaken by the ACCC. It is expected that the ACCC will, in
accordance with its usual practice, issue guidelines on its approach to
enforcing the legislation.
8.144 The ACCC's EPM inquiry is due to run for seven years, from
2018 to 2025. The legislation will sunset in 2025, at the conclusion of the
monitoring inquiry. However, The Government's intention is that a
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Regulation impact statement
review will be conducted in 2024 to determine whether the inquiry and
legislative framework should be extended beyond 2025.
8.145 The effectiveness of the legislative framework will be measured
with reference to the three problems identified in section 1. The legislative
framework will be considered successful if:
• price outcomes for consumers, both individually and on
average reflect underlying wholesale electricity costs;
• electricity contract markets are sufficiently liquid to allow for
competition among retailers; and
• wholesale electricity markets are characterised by effective
competition and competitive constraint.
8.146 The ACCC's ongoing inquiry is well-suited to monitor these
outcomes over time.
109
Chapter 9
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Treasury Laws Amendment (Prohibiting Energy Market
Misconduct) Bill 2019
9.1 This Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
9.2 Schedule 1 to the Bill implements a comprehensive legislative
framework consisting of new prohibitions and remedies tailored to
conduct in electricity markets.
9.3 Schedule 2 to the Bill contains information gathering powers,
which will allow the Australian Energy Regulator (AER) to gather and
use information about energy businesses.
Human rights implications
9.4 The Bill engages the right to privacy in Article 17 of the
International Covenant on Civil and Political Rights (ICCPR).
Article 17 - Right to privacy
9.5 Article 17 of the ICCPR prohibits arbitrary or unlawful
interference with an individual's privacy, family, home or
correspondence. This can include the collection, security, use, disclosure
or publication of personal information.
9.6 Item 11 of Schedule 1 to the Bill allows the ACCC to use its
information gathering powers in Section 155 in relation to an order made
by the Treasurer or Federal Court under Part XICA. The evidence that the
ACCC may require must relate to such an order, and a notice under
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Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019
section 155 is likely to be given to an officer or employee of a corporation
or other body corporate that has been subject to an order that has been
made under Part XICA. The information or evidence that they may be
required to provide may include evidence about how the corporation or
body corporate has complied or is complying with the order. Existing
protections relating to self-incriminating evidence and documents that are
the subject of legal professional privilege apply unmodified.
9.7 Item 5 of Schedule 2 to the Bill gives the AER information
gathering powers, including the power to require a person to give written
or verbal evidence. The evidence must relate to the performance of the
AER's functions under regulations made for section 44AH of the
Competition and Consumer Act, including, for instance, the Competition
and Consumer (Industry Code-Electricity Retail) Regulations 2019 which
prescribes the Retail Electricity Code of Conduct under which the AER
determines default offer prices for the supply of electricity to residential
and small business consumers. The types of persons who might be
required to give such evidence in relation to these determinations would
include officers or employees of electricity retailers. The type of evidence
they may be required to give would include evidence about the operation
of the business, including, for instance, about how retail electricity prices
are set and the necessary costs a business incurs to provide such services.
Persons cannot be compelled to give self-incriminatory evidence or
evidence that is subject to legal professional privilege. The use and
disclosure of any evidence collected in this way would be regulated by
section 44AAF of the Act.
9.8 These powers are broadly modelled on the Australian
Competition and Consumer Commission's information gathering powers
in section 155 of the Competition and Consumer Act, and will underpin
the AER's role in the delivery of retail market reforms aimed at reducing
electricity prices.
9.9 Item 3 of Schedule 2 to the Bill amends section 44AAF of the
Competition and Consumer Act to authorise the disclosure of protected
information to another agency if the AER is satisfied that the information
will enable or assist the agency to perform its functions or powers. This
provision is broadly modelled on section 127(4)(a) of the Australian
Securities and Investments Commission Act 2001 and is supported by the
COAG Energy Council. This amendment is not targeted at the disclosure
of personal information, but is instead intended to facilitate the transfer of
information about the energy market to agencies that have an interest in
that information.
9.10 Article 17 of the ICCPR relates to the use or disclosure of
personal information, while the amendments referred to above are targeted
at the collection, use and disclosure of business information. As such, the
right to privacy is not affected.
112
Statement of Compatibility with Human Rights
Conclusion
9.11 The Bill is compatible with human rights because it does not
affect the right to privacy under Article 17 of the ICCPR.
113
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