Pricing and repeal of the carbon tax

In brief

The legislation that will repeal Australia's carbon pricing scheme will also introduce some significant new prohibitions, and confer some extensive enforcement and price monitoring powers on the Australian Competition and Consumer Commission, to ensure that the repeal of the scheme is accompanied by a corresponding reduction in the price of emissions or energy-intensive goods and services. Partners Grant Anderson and Fiona Crosbie report.

Background

On 13 November 2013, the Federal Government introduced into Parliament legislation to repeal Australia's carbon pricing scheme with effect from 1 July 2014.¹ As previously explained, despite the scheme's repeal, liable entities will still be required to fully acquit their 2013/14 liabilities, including by making a final surrender of carbon units by 1 February 2015. With the Senate's rejection of the repealing legislation on 20 March 2014, it appears that the Government will need to wait until the Senators elected at the September 2013 Federal election take their seats on 1 July 2014 for the legislation to be passed (while the Government does not have a majority in the new Senate, current indications are that it will be able to garner enough support from the micro party Senators to have the legislation passed). Assuming the repealing legislation comes into operation by the end of August 2014, no 2014/15 vintage year carbon units will have been issued² and so there will be no question of 2014/15 carbon unitholders being able to make a windfall gain by selling those units through the buyback mechanism and being paid for them in circumstances where there is ultimately no 2014/15 carbon liability.³ However, if the repealing legislation only comes into operation some time after 1 July 2014, then liable entities will enter 2014/15 at a time when the carbon pricing scheme is still in force. As such, it would be reasonable for them to build into their 2014/15 prices an allowance for their 2014/15 carbon liability⁴ – at least until the scheme is actually repealed.

It is against this background that we examine the amendments that the repealing legislation will make to the Competition and Consumer Act 2010 (Cth) (the CCA) so as to impose two new prohibitions, and confer extensive enforcement and price monitoring powers on the ACCC, in connection with the repeal of the carbon pricing scheme.⁵

New prohibitions

The first new prohibition is on a corporation making false or misleading representations, during the period 1 July 2014 to 30 June 2015, concerning the effect of the repeal of the scheme on the price for the supply of goods or services.⁶ This supplements the existing prohibition on a corporation making false or misleading representations in connection with the supply of goods or services.⁷

The second new prohibition is on a corporation that supplies 'regulated goods' – electricity, natural gas, synthetic greenhouse gases or equipment that contains synthetic greenhouse gases (eg refrigeration units)⁸ – charging a price for the supply of those goods which is:

• unreasonably high having regard alone to the repeal of the carbon pricing scheme; and
• unreasonably high even if the supplier's costs, supply and demand conditions and other relevant matters are taken into account.⁹

This second prohibition is referred to as the prohibition on 'price exploitation in relation to the carbon tax repeal'. The test of what constitutes an 'unreasonably high' price is one of reasonableness, and the courts are expected to take into account the specific circumstances of the case in considering whether the price of supply was unreasonably high.¹⁰ This may mean that, notwithstanding the repeal of the carbon pricing scheme, there are valid reasons for a corporation not to reduce the price at which it supplies regulated goods by the same proportion as that price was increased to allow for the operation of the carbon pricing scheme.

Significant penalties will apply for a contravention of these prohibitions. The maximum pecuniary penalty will be $1.1 million for corporations and $220,150 for individuals.¹¹ However, as an alternative to court proceedings, the ACCC can issue an infringement notice under which the alleged contravener may, without admission of liability, pay a smaller pecuniary penalty ($102,000 for a listed corporation, $10,200 for any other body corporate, and $2040 for a non-body corporate) and obtain immunity from proceedings by the Commonwealth/ACCC (but not third parties) in respect of the alleged contravention.¹² Such a notice will typically only be issued for minor contraventions.¹³

In addition, the ACCC will be able to apply for injunctive relief against actual or proposed conduct in breach of these prohibitions, as well as for a corrective advertising order.¹⁴ In the case of price exploitation, the ACCC will also be able to apply for a court order that the corporation not supply the regulated goods at above a specified price and/or that the corporation refund money to purchasers of the regulated goods.¹⁵

Moreover, any person who suffers loss or damage as a result of a breach of either prohibition may recover the amount of the loss or damage, or have the benefit of a court compensation order.¹⁶

While both of these prohibitions (and the ancillary enforcement powers referred to below) come into effect once the repealing legislation receives Royal Assent, on their face they apply to representations and supplies made since 1 July 2014. This means that if (as is likely to be the case) Royal Assent is given after 1 July 2014, the prohibitions will apply with retrospective effect.

ACCC's new enforcement and price monitoring powers

The legislation will give the ACCC a number of new powers:

• The ACCC will be able to issue a notice to a corporation if it considers that the corporation has engaged in price exploitation in relation to the carbon tax repeal, in which case the notice is prima facie evidence of such price exploitation,¹⁷ ie the corporation has the onus in any court proceedings of proving that the price of the regulated goods it supplies is not unreasonably high. The ACCC can also issue a 'warning' notice to a corporation if it believes that doing so would aid in preventing the corporation engaging in price exploitation, in which case the notice must specify the maximum price that (in the ACCC's opinion) may be charged for the supply of the relevant goods without contravening the prohibition.¹⁸
• The ACCC will have the power to monitor prices to assess the general effect of the repeal of the carbon pricing scheme on prices charged, offered or advertised by corporations for the supply of regulated goods in the period from 1 July 2014 to 30 June 2015, and may use this power to assist it in considering whether a corporation has engaged in, is engaging in, or may in the future engage in, price exploitation in relation to the carbon tax repeal. This power will also extend to enabling the ACCC to monitor the prices charged, offered or advertised for goods, in the period from 1 July 2014 to 30 June 2015, by corporations that are liable entities under the carbon pricing scheme. In addition, to provide it with a 'baseline' against which to compare those prices, the ACCC will have the power to monitor prices prior to 1 July 2014 to assess the general effect of the carbon pricing scheme on such prices.¹⁹ Given the delay in the passage of the legislation, the Treasurer has already exercised an existing power to direct the ACCC to monitor the prices, costs and profits of the suppliers of electricity, natural gas and synthetic greenhouse gases, as well as of carbon pricing scheme liable entities.²⁰ This has led to the ACCC recently issuing requests for information to such suppliers and liable entities. While the provision of this information is voluntary, the ACCC does have recourse to compulsory information-gathering powers if necessary.²¹
• The ACCC will have coercive information-gathering powers under which it can require the provision of information and documents that it reasonably believes may be useful to it in monitoring prices as described above.²²

The ACCC will be required to report quarterly to the Treasurer about the exercise of these powers and these reports will be made publicly available.²³

What companies should do

Given the likely retrospective operation of the prohibitions on false or misleading representations and on price exploitation in relation to the carbon tax repeal, it is important that companies ensure that their pricing practices from 1 July 2014 do not contravene those prohibitions, even though the prohibitions may not actually be in operation at that time.

This means that companies should carefully review their advertising and other material to ensure that, at least during 2014/15, it does not misrepresent the effect of the repeal of the carbon pricing scheme on their prices. For example, it would be a breach of the prohibition on false or misleading representations for a company to claim that the repeal of the carbon pricing scheme only enabled it to reduce its prices by $3 per unit if its direct liability under the scheme accounted for $2 per unit and, as a result of the repeal of the scheme, the company's upstream suppliers had reduced the prices at which they sold inputs to the company by the equivalent of $1.50 per unit of product supplied by the company. Although it would be preferable to avoid making any claims about the impact on prices of the carbon pricing scheme repeal, if such claims are to be made then the company will need to understand not just the direct carbon component that it has included in its prices, but also the carbon component that may have been embedded further up the supply chain (and which is therefore indirectly incorporated into the company's prices) and how upstream suppliers are unwinding that component.

The prohibition on price exploitation in relation to the carbon tax repeal is specific to the suppliers of electricity, natural gas and synthetic greenhouse gases (including synthetic greenhouse gases in equipment), and these suppliers will be a particular focus of the ACCC's price monitoring regime. It will be critical for such suppliers to be able to identify and substantiate the carbon component included in the prices of the goods that they supply. This will enable them to respond accurately to the ACCC's request for information about the impact of the carbon pricing scheme on their prices, which will set the baseline against which expected price reductions consequent upon the repeal of the scheme will be assessed. There may well be valid reasons for their prices not to be reduced to pre-carbon pricing scheme levels notwithstanding the repeal of the scheme. This could be because general market conditions have changed (eg demand for the supplier's goods has increased relative to supply), there has been a general inflationary impact on prices, other costs of the supplier have increased, the supplier is reimbursed for its carbon costs on a lagged basis (so that it is still recouping costs associated with its 2013/14 carbon liability in 2014/15), upstream suppliers have not reduced their prices to fully remove the carbon component from the prices they charge the supplier, or an allowance for a 2014/15 carbon price is built into their cost base and cannot be unilaterally reversed out (eg as where an electricity retailer has entered into a long-term hedge that includes allowance for such a price in its strike price). The important point is that suppliers of these goods should carefully document these factors so that they are able to establish the reasonableness of their prices if they face a challenge from the ACCC. This will be particularly so if the supplier has previously advertised that an increase in its prices was due to the carbon pricing scheme; in such a case, the ACCC is likely to use that increase as a starting point for the amount by which the supplier should be reducing its prices as a result of the repeal of the scheme. Moreover, it should not be unreasonable for such suppliers to include an allowance for their potential 2014/15 carbon liability in their 2014/15 prices, at least until the carbon pricing scheme has actually been repealed, and it would be useful if the ACCC were to issue a guideline to this effect.

Companies should also review their contracts, and the operation of any provisions that regulate the pass through of carbon-related costs, to determine how those provisions operate in the context of a repeal of the carbon pricing scheme – and, in particular, a retrospective repeal of the scheme. To the extent that suppliers do include in their 2014/15 prices an allowance for their potential 2014/15 carbon liability (as where the carbon pricing scheme has not been repealed by 1 July 2014), there may be a basis for negotiating the refund of that allowance (eg directly or through reduced future prices) once the scheme has actually been repealed because otherwise the supplier will be making a windfall gain. However, whether this is possible could well turn on the actual wording of the contract and the relative bargaining power of the parties.

Next steps

Companies should start preparing for the repeal of the carbon pricing scheme by analysing their price structures to identify carbon-related components, and by reviewing their contracts to ascertain how any carbon cost pass through provisions contained in them will operate in the context of a retrospective repeal of the carbon pricing scheme.

If you would like further information, please contact any one of the people below.