In early June 2020, the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Act 2019 (also referred to as the Big Stick legislation) came into effect. This was approximately 6 months after reaching royal assent, with the legislation being passed through parliament in late 2019.
The intent of the new legislation is to ensure that reductions in wholesale energy costs are passed on to customers, and that generators and wholesale market participants can’t manipulate electricity prices or cause consumers to pay more than is reasonably necessary. There are penalties that will apply to energy companies who exhibit anti-competitive behaviour or moves to manipulate electricity prices.
The Australian Competition and Consumer Commission (ACCC) will have responsibility for enforcing the legislation, with penalties to punish misconduct ranging from public warnings and court ordered fines through to forced divestment.
What are the areas of focus of the legislation?
The legislation has three broad areas of focus:
1. Retail pricing
This focus area requires energy retailers to pass on ‘sustained and substantial’ reductions in wholesale costs to small energy consumers.Short term price reductions are not expected to be passed through to customers.At the moment there is no specific definition of what constitutes a sustained or longer term price reduction.Rather, the ACCC can compel retailers to provide information on its wholesale costs and can determine if they have breached this area of the legislation.
2. Wholesale contract liquidity
This area requires generators to ensure they maintain liquidity in the wholesale (derivative) market and penalises generators that withhold electricity contracts for the purpose of substantially lessening market competition.This does not mean that all generators must always offer supply contracts.There are reasons why a generator may not enter into contracts with, for example, rival retailers or if the generation profile does not match the supply profile.Again, the ACCC has the power to obtain information from generators to determine whether they withheld contracts for anti-competitive reasons.
3. Wholesale prohibition
This area bans generators from manipulating the spot market by, for example, withholding supply to inflate prices.The ACCC (or the Australian Energy Regulator) will monitor behaviour and seek information from generators to determine if generators have either:
(a) Acted dishonestly, fraudulently or in bad faith; and / or
(b) Distorted or manipulated the spot market.
What are the penalties and potential remedies for breaches?
Any breaches of the areas outlined above may result in a series of penalties or remedies. These are determined or recommended by the ACCC and they must be proportionate and targeted to the misconduct and include one (or more) of the following:
- Small breaches would likely result in warnings and / or infringement notices by the ACCC.
- Larger breaches may see the ACCC apply to the federal court for civil penalties up to the greatest of:
- $10 million; or
- 3 times the value of the total benefit attributable to the conduct; or
- 10% of the annual turnover of the corporation in the 12 months before the conduct occurred.
- More serious and material breaches could result in the ACCC recommending a ‘Contracting Order Recommendation’ to the Federal Treasurer.If the Treasurer accepts the contracting order recommendation, this would require the generator to offer derivative contracts for sale to retailers.
- The last resort remedy, for the most serious breaches would result in the ACCC recommending a ‘Divestiture Order Recommendation’ to the Treasurer.If the Treasurer accepts this recommendation, then the Treasurer would apply to the Federal Court for a divestiture order.
- If the application is approved, the Federal Court will determine whether the generation business is in breach, and whether divestiture is an appropriate course of action.
- These orders would allow a minimum of 12 months for a business to sell an asset or assets to a third party.
- Noting that some generation assets are Government owned, these businesses will be provided the opportunity to divest to another business owned by the same government that is considered to be in genuine competition with the original business.
Energy Action welcome the introduction of this new legislation and believe it will ultimately benefit energy consumers.