Divestment Bill: Is the Government’s 'Big Stick' really new and improved?

The Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill (the Divestment Bill) has led a controversial existence. On 5 December 2018 it was introduced to the Parliament (the 2018 Bill), and after much to-ing and fro-ing, it was taken off the notice paper the next day following concerns that the Bill would not pass the Parliament, or might be amended against the Government’s wishes.

Since that time, we have had a Senate Economics Committee Inquiry into the merits of the Bill, and the Government has been encouraged by industry, consumer advocates, and energy experts alike to amend it to mitigate some of the significant unintended consequences the Bill as drafted would deliver.

Over the last three months the industry (led by the Business Council of Australia and the Australian Energy Council) has developed a range of potential amendments to the Bill to make it more workable.  Those amendments were either technical or procedural in nature.  

This week, the Divestment Bill (the 2019 Bill) was re-introduced into the Parliament with minor amendments. The substantive issues with the 2018 Bill have not been resolved.  The Bill in this form will not lower prices, will not increase reliability, and will clearly discourage the new investment the electricity sector desperately needs during the energy transformation.

What is the purpose of competition laws?

The Competition and Consumer Act (CCA) aims to ‘enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’.[1] This principle is well accepted, but the challenge with competition law comes with determining what level of intervention will deliver optimal consumer outcomes.

In 2015, the Abbott Government commissioned the Competition Policy Review, known as the Harper Review, to look at this question[2]. The panel found that a law should be simple, predictable, and reliable. To achieve this, the language of the law “should be clear to market participants and enforceable by regulators and the courts.”, and the law “should prohibit specific categories of anti-competitive conduct, with economy-wide application.” An additional test should then be considered – the scope of the law should not over-reach (by prohibiting pro-competitive conduct) or under-reach (by failing to prohibit anti-competitive conduct).

In 2017, the Turnbull Government implemented the findings of the Harper Review, ensuring the CCA was fit for purpose. At the time, the ACCC supported the new laws, stating “These new laws have far reaching implications for the Australian economy and should significantly boost growth. The Harper Review recommended these changes to enhance the benefits that should flow to consumers and businesses when markets operate efficiently.”[3]

So what does the Divestment Bill do?

The Bill re-introduces sector specific misconduct prohibitions into the CCA. In this case, the misconduct provisions relate to retail pricing, the provision of financial contracts, and bidding. All of these prohibitions exclusively relate to electricity generators and retailers, as defined in the National Electricity Law.

It also creates a number of sector specific penalties which can be levied on companies found to have breached the prohibitions. These include the forcible divestment of any related assets, or the making of a contracting order, requiring a generator from offering contracts of any type, size, or price for a period of three years. 

What reforms was industry seeking?

The AEC undertook a detailed review of the 2018 Bill to suggest amendments that would provide the sector with greater confidence of the types of conduct prohibited, and to mitigate the obvious risks a Bill of this nature creates.  

Retail Misconduct

The Retail prohibition requires retailers to make reasonable adjustments to prices to reflect sustained and substantial reductions in its underlying cost of procuring electricity. The Explanatory Memorandum goes into significant detail about what this might mean in practice, but is unable to highlight specific instances of misconduct that necessitate a change of this kind.   

It is the AEC’s position that given the introduction of the Default Market Offer (DMO), the issues identified by the ACCC as part of their Retail Electricity Pricing Inquiry would be resolved. As such, the retail prohibition, stated by the Government as critical to ensure cost savings were passed through was no longer necessary. There has never been any suggestion that competitive, well priced, market offers are not available.

If the Government still considered the prohibition remained critical, the AEC proposed a two-step approach would better achieve the stated intention. This would enable the regulator to identify an overall cost reduction during their periodical reviews, and then require retailers to prove that those reductions were being taken into account with their future pricing decisions. This would avoid concerns that remain that the Bill as drafted requires more frequent price changes, both increases and decreases, to ensure the retailer meets their obligations.

The Government rejected all suggested amendments. The only change between the 2018 Bill and the 2019 bill was to exclude Standing Offer prices from the prohibition, interestingly the only prices found by the ACCC in its review as being priced unnecessarily high.       

Contracting Misconduct

The Contracting prohibition closely aligned (albeit was not identical) to the misuse of market power obligations inserted into the CCA in 2017. A gentailer is prohibited from failing to offer (or offering on unreasonable terms) financial contracts for the purpose of substantially lessening competition in an electricity market.

This slight deviation from existing prohibitions concerned industry. Given the drafting was intentionally different, the application would be broadened, risking over-capture, and precluding simplicity and predictability.

To avoid these concerns, the AEC encouraged the government to mirror the existing CCA obligations to mitigate the risk of unintended consequences.

The Government has to date not provided any rationale as to why this approach would not achieve its objectives, however the provisions in the 2019 Bill remain unchanged.

Bidding Misconduct

The Government considered that the existing obligations requiring good faith re-bidding in the National Electricity Rules did not adequately capture a generator who failed to bid into the National Electricity Market. The existing obligations only captured conduct in which a generator re-bid their available supply. Despite these concerns, the only examples provided by the Government in the Explanatory Memorandum described conduct that would be captured by the existing rules, or were in line with the intent of the market design.

Again, industry was concerned that the lack of clarity, in particular the lack of any identifiable examples of misconduct where the existing rules were found to be inadequate, raised significant regulatory risks.

The Bill prohibits generators from bidding or failing to bid, fraudulently, dishonestly, or in bad faith for the purpose of distorting or manipulating prices in the spot market.

The AEC provided the Government with a number of suggested amendments that would clarify the intent of the provision, ranging from replicating the type of language found in the Electricity Laws, to including provisos that conduct of the type consistent with the design of the market would not breach the prohibition. Again, all suggested amendments were rejected, with no rationale as to why these changes would diminish the application of the Bill.

Contracting powers

The Bill enables the Treasurer to impose on any generator a contracting order if it is found to have breached the contracting misconduct prohibition.

This extraordinary power would allow the Treasurer to be able to be make an order on any terms, at any price, for any volume of energy, for a period up to three years. This clearly raised fundamental concerns for industry. The risk of politicisation is obvious.

To that end, the AEC suggested that the ultimate decision to make a contracting order should sit with the Federal Court, which would be requested to make the order by the Treasurer. In line with the changes made to the Divestment Power when the previous Bill was found to be unconstitutional, this would have provided confidence that these orders would only be imposed appropriately.

The Government again rejected this view, preferring to maintain control over the orders. The impacted generator has only administrative right of appeal, with no avenue to appeal to the Courts on merit. This Bill will be in place for the next 6 years. In that time we will see three separate Governments, all holding the ability to make this extreme order.

What has changed?

The 2019 Bill includes a number of minor procedural amendments, which are welcomed, but will not resolve industry’s substantive concerns.

The Bill will now commence 6 months after royal assent, a change the Government says will allow industry a significant period in which to ensure compliance. But in reality, given how vague the provisions in the Bill are, industry will not be able to implement the changes until the ACCC publishes its enforcement guidelines. This process can often be lengthy, significantly eroding the time allowed for implementation.

The Bill also includes the so-called ‘Katter amendment’, intending to prohibit the privatisation of public assets, and clarifies that personal liability will only apply to senior employees, mitigating the risk that relatively junior traders might be captured.  Expectations for this Bill

The 2019 Bill will do nothing to lower energy prices or increase reliability. It gives the Government and its Regulator the power to enter into the operations of businesses and determine the terms on which they contract. It enables the Government to direct retailers how they price their competitive market offers, and in some circumstances, allows the Government to apply to the court to forcibly divest market participants of their assets.

This Bill will not deliver a positive signal to would-be investors in this market, investment that is badly needed to stabilise energy prices; instead it simply heightens risks for market participants.

It has been said that similar powers exist in other countries, so there is a precedent for them. But as we are reminded by the Harper Review, over-reach and sector specific misconduct provisions will have unintended consequences on the Australian energy market, and the economy more broadly.

The 2019 Bill was not provided to stakeholders prior to its tabling in Parliament on Wednesday. The lack of visibility of the Bill, or serious consideration of more substantial amendments to avoid unintended consequences, provides little confidence for energy market participants as it continues its passage through the Parliament over the coming months.  The ACCC will have a challenge ahead of it to draft Guidelines for industry which overcome the Bill’s vague and uncertain provisions.

[1] Competition and Consumer Act 2010, section 2.

[2] The Australian Government Competition Policy Review, Harper, Anderson, McCluskey, O’Bryan, 2015

[3] https://www.accc.gov.au/media-release/accc-welcomes-new-era-in-competition-law