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In brief

The Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Act 2020 (Act) commenced on 29 January 2021, arming the Australian Energy Regulator (AER) for the first time with the power to compulsorily seek information and to undertake compulsory examinations in the course of investigations.  The Act also very significantly increases the maximum penalties for contraventions of the civil penalty provisions in the National Energy Law and associated legislation and rules, on terms that are analogous to the penalty regime in the Australian Consumer Law.

This alert summarises the key changes and risks associated with the new regime that market participants should be aware of, and identifies steps that should now be taken to minimise those risks.


In depth

New tiered system attracting civil penalties

The Act implements a new tiered civil penalty regime which applies to the National Electricity Law (NEL), National Electricity Retail Law (NERL), National Gas Law (NGL) (together, the National Energy Law), National Electricity Rules (NER), National Energy Retail Rules (NERR), and National Gas Rules (NGR) (together the National Energy Rules).  The regime allocates each civil penalty provision within the National Energy Law and the National Energy Rules to one of three separate penalty tiers, based on seriousness of the conduct.

The AER has released a Decision Matrix and Concepts Table (available here), which explains the tiered penalty scheme and the underlying criteria for each concept.

Tier 1 civil penalty:

The most substantial penalties fall under Tier 1, being conduct resulting in Consumer Harm (Type 1), Adverse Market Impact, non-compliance with Supply Security and Reliability or Unacceptable Market Participant Behaviour.

Unacceptable Market Participant Behaviour is broadly aimed at deterring misconduct where civil penalty provision breaches may result in financial gain, the conduct is deliberate or reckless, a contravention is difficult to detect or involves a failure to comply with specific notices from the regulator. There is no predecessor to the Tier 1 category, which is based on the Australian Consumer Law.

This tier is concerned with the most egregious breaches that endanger public safety and may result in death or serious injury.  However, this tier also covers a significant number of civil penalty provisions under both the National Energy Law and National Energy Rules, the breach of which may lead to financial gain for the corporation or have an adverse impact on the integrity of the wholesale market. For instance, a regulated transmission system operator complying with transmission determinations (and correspondingly, the same requirement for regulated distribution system operators).

Tier 2 civil penalty:

Tier 2 breaches include conduct resulting in Consumer Harm (Type 2), inefficient Market Administration or Inappropriate Market Participant Behaviour.

Breaches of civil penalty provisions that do not reach the thresholds described in Tier 1, can be captured by the lesser standard of Consumer Harm (Type 2) and Inappropriate Market Participant Behaviour. Compared to “unacceptable” behaviour in Tier 1, Inappropriate Market Participant Behaviour seeks to address behaviour that may not result in direct harm to consumers but the AER still wishes to deter, for example, failing to comply with general reporting obligations to regulators. For Consumer Harm (Type 2), this includes not adequately informing consumers of their rights, failing to provide consumers with supplementary services, inappropriate disclosure of consumer data and failing to comply with rules regarding fees and charges.

Additionally, breaches of record keeping requirements in relation to Retailer Reliability Obligations (RRO) or compliance with performance standards may attract Tier 2 penalties in the category of Market Administration. Examples include the obligations to accurately report net contract positions to the AER by a liable entity (section 14P(1) and (3) of the NEL).

Tier 3 civil penalty:

Tier 3 is intended to capture all other civil penalty provisions and includes the prior civil penalty provisions, with some exceptions listed below. There are numerous civil penalty provisions which are subject to Tier 3, but the provisions generally relate to compliance with administrative requirements on the content and issuing of bills, content of consumers contracts, provision of information to consumers and instances where non-compliance does not result in consumer or market harm.

Specific provisions:

There have been specific amendments to penalties to the RRO, which previously had a separate penalty regime. These amendments will now align the RRO provisions with Tier 2 civil penalties for an initial breach and Tier 1 for subsequent breaches. The RRO scheme was introduced in July 2019 to incentivise reliability by requiring certain large energy users to hold contracts or invest directly in generation during peak demand periods.

The NER’s rebidding provisions will also now be subject to Tier 1 civil penalties. The rebidding provisions include various rules requiring offers, bids and rebids into the wholesale spot market to not be false or misleading.

Infringement Notices

The Act also amends the maximum penalty for infringement notices issued by the AER. An infringement notice issued for a Tier 1 or Tier 2 contravention will subject the recipient to the higher of the two tiers of infringement penalty. Lower infringement penalty rates will apply for Tier 3 breaches. This lower rate is largely based on the prior infringement penalty amount but is also amended to reflect the real terms value since the original rates were set.

Infringement Penalties – Maximums for Body Corporates and Individuals
  Original – Corporations Reform – Corporations Original – Individuals Reform – Individuals
Tier 1 N/A AUD 67,800 N/A AUD 13,600
Tier 2
Tier 3 – Higher AUD 20,000 AUD 33,900 N/A AUD 6,790
Tier 3 – Lower N/A AUD 6,790 N/A N/A

 

Maximum Penalties under Tier 1 -3

The following table summarises the maximum civil penalties for companies and individuals (per contravention) comparing the old and new regimes:

Civil Penalties – Maximum for Body Corporates and Individuals
  Original – Corporations New – Corporations Original – Individuals New – Individuals
Tier 1 N/A AUD 10,000,000

or three times the value of the benefit

or 10% of the annual turnover of the body corporate

N/A AUD 500,000
Tier 2 AUD 1,000,000 (but only in relation to rebidding provisions) AUD 1,435,000 AUD 20,000 AUD 287,000
Tier 2 – Daily* AUD 50,000 AUD 71,800 AUD 2,000 AUD 14,400
Tier 3 AUD 100,000 AUD 170,000 AUD 20,000 AUD 33,900
Tier 3 – Daily AUD 10,000 AUD 17,000 AUD 2,000 AUD 3,390

*Daily refers to the subsequent penalty that may be imposed for each day on which the breach continues un-remedied.

Increased AER Compulsory Powers

For the first time, the Act grants the AER the power to issue a notice requiring the provision of information, or for an individual to appear before the AER to answer questions, in relation to an investigation for potential contravening conduct. This reform puts the AER’s enforcement powers on par with the ACCC and ASIC.  The new enforcement powers came into effect on the commencement date and apply to conduct that occurred both prior to and after the commencement date of the Act.

The AER has published Compulsory Notice Guidelines (available here), which provide explanatory details on:

  • The rights and obligations of persons served with a compulsory notice.
  • The conduct of an oral examination.
  • The use of information provided under a compulsory notice.

The penalty for failing to comply with a notice, or for providing false or misleading information to the AER is AUD 6,300 for an individual or AUD 31,500 for a corporation.

Risks and considerations for market participants

The increased enforcement powers granted to the AER and the considerably increased maximum penalties for contraventions significantly increase the risk for parties that are subject to the National Energy Law and the National Energy Rules.

Many civil penalty provisions under the National Energy Law and the National Energy Rules are complicated, highly technical and operational in nature. As an illustration, certain contraventions of the general responsibilities of registered participants in the National Electricity Market (including compliance with dispatch instructions, compliance with generation / network dispatch offers and compliance with market ancillary service offers at all times) could now attract Tier 1 civil penalties.

In practice, compliance with many of the applicable civil penalty provisions is dependent on the design and implementation of robust systems and processes and the data available to market participants, as opposed to the behaviour and day to day decisions made by participants.  Very significant penalties may now be ordered for contraventions which potentially result from systems and processes being inadequately designed or implemented or where there are failures to monitor and audit such that inadvertent breaches occur or there is a failure to detect breaches.

The increased compulsory powers of the AER also create new and increased risks.  When an individual is required to attend an examination, there are many complexities and considerations that market participants and individuals will need to account for and manage, including ensuring that individuals are equipped to undergo examination on subject matters that are highly technical in nature, in circumstances where they may be asked to recall events or actions that occurred months or even years prior to the examination.  Individuals’ health and wellbeing should also be carefully monitored given the risk in some cases of personal liability for civil penalties and the considerable stress that individuals face when they are the target of coercive regulator powers.

Market participants should undertake a full review of existing systems and processes that are relevant to compliance with the civil penalty provisions in the National Energy Law and the National Energy Rules.  They should ensure that robust compliance programs are in place, together with employee training, so as to ensure that the increased risks associated with the new regime are understood and addressed and that all relevant staff, particularly those that are either direct market and customer facing or involved in bidding, rebidding and offers for ancillary services, are adequately trained and have the requisite knowledge to carry out their functions so as to ensure that contraventions do not occur.  Market participants should also ensure that they have systems in place to ensure they can respond promptly and accurately to compulsory notices and to prepare officers or employees for examinations when necessary.

Please contact us if you would like to discuss the potential impact of the new regulatory framework on your business.

Author

Author

Helen Joyce is a member of Baker McKenzie’s Dispute Resolution Practice Group. She joined the Firm as senior associate in 2010. Prior to this, Helen spent nine years working at Devonshires Solicitors in London, where she attained partnership.Helen has extensive commercial litigation experience, advising clients on a broad range of matters including complex contractual disputes, competition, white collar fraud and regulatory investigations, and schemes of arrangement. In addition to her skills as a litigator, Helen has extensive experience representing clients in formal and informal negotiations and other forms of alternative dispute resolution including mediation and arbitration.

Author