Energy regulation – a big stick for electricity and a white paper for gas

In brief 5 min read

The Federal Government's 'big stick' energy Bill, which will define and prohibit several new types of misconduct in electricity markets, is progressing through Parliament and is expected to be passed by the end of the month. The changes are of particular relevance to corporations operating in the electricity industry, especially in light of the series of new remedies for breaches of the Bill's prohibitions, which we outline below.

Meanwhile, COAG has instigated a holistic review of gas pipeline regulation and is considering improvements to transparency measures in gas markets. We examine these developments and the future of energy regulation.

'Big stick' legislation progresses through Parliament

The Government's 'big stick' energy Bill – also known as the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2019 (Cth) – is progressing through Parliament and is expected to be passed by the end of the month.

The Bill passed the House of Representatives in October and passed the Senate with a minor amendment on 12 November 2019. The amended Bill will now be referred back to the House of Representatives for approval, which is expected to occur when the House next sits in the last week of November. Once passed, the Bill is set to commence six months after it receives Royal Assent.

Earlier this month, the Senate Economics Legislation Committee effectively gave the Bill the green light, dismissing industry concerns regarding the scope and uncertain application of the new provisions. The Committee did so on the basis that such concerns will be resolved by guidelines to be issued by the ACCC on its enforcement approach (even though such guidelines will not have the force of law).

Broadly, the Bill will amend the Competition and Consumer Act 2010 (Cth) to establish new prohibitions for corporations operating in the electricity industry and provide a series of new remedies for breaches of these prohibitions. Those prohibitions include:

1. in relation to retail pricing – failing to make reasonable adjustments to the price of retail market offers to small customers to reflect reductions in the underlying costs of procuring electricity;
2. in relation to electricity financial contract liquidity – failing to offer, or limiting or restricting offers of, electricity financial contracts, for the purpose of substantially lessening competition; and
3. in relation to the electricity spot market – bidding, or failing to bid, in the spot market fraudulently, dishonestly or in bad faith, and / or for the purpose of distorting or manipulating prices.

Remedies available to the ACCC for such prohibited conduct will include public warning notices, infringement notices and penalties. Further, in certain circumstances, the Treasurer may order a corporation to make offers to enter electricity financial contracts with third parties as a remedy for the conduct listed in (2) and (3) above, and the Federal Court may order a corporation to divest specified assets as a remedy for the conduct listed in (3) above. 

COAG consultations: a holistic review of gas pipeline regulation and improvements to gas market transparency

The COAG Energy Council is conducting a holistic review of the economic regulation of gas pipelines, and is also considering the introduction of new gas market transparency measures. This follows on from earlier reports that have already resulted in material changes to pipeline regulation, such as the Vertigan Report of December 2016. 

Economic regulation of gas pipelines

The COAG Energy Council is consulting on options to improve the economic regulation of gas pipelines. Earlier this month, it released, for comment, a consultation Regulation Impact Statement (RIS), which contemplates a broad range of potential reforms, including a complete overhaul of the regulatory framework.

The consultation follows the AEMC's 2018 review into the scope of economic regulation applied to covered pipelines, and the ACCC's suggestions for change flowing from its ongoing Gas Inquiry 2017–2020. The potential problems COAG seeks to address include:

• that the current framework may be resulting in under-regulation and / or over-regulation of pipelines;
• inconsistencies and overlap between different forms of current regulation;
• that shippers' ability to negotiate access may be hampered by limited information disclosure required under the current framework; and
• that negotiation and dispute resolution frameworks are not working effectively for shippers.

In that context, the stated purpose of the RIS is to:

• identify and evaluate the options to deliver a more efficient, effective and well-integrated regulatory framework for gas pipelines; and
• assess the effectiveness of Part 23 of the National Gas Rules (being the information disclosure and arbitration framework for non-scheme pipelines).

The RIS sets out four broad options:

1. maintaining the status quo;
2. regulating all pipelines that have substantial market power;
3. regulating all pipelines providing third party access, as well as other pipelines that satisfy the test for regulation; and
4. regulating all pipelines.

The RIS is supported by analysis from various external consultants, including an international review of pipeline regulation, a survey of shippers in relation to Part 23, and a review of financial information reported under Part 23. In addition, the RIS indicates that, as part of COAG's assessment, the options for regulatory reform will also be subject to: a risk analysis, a cost-benefit analysis, a regulatory burden analysis and a competition effects analysis.

Submissions responding to the RIS are due by 20 December, and stakeholder meetings are being held in Sydney, Melbourne, Brisbane and Perth in late November.

Consideration of measures to improve gas market transparency

COAG's work on the regulation of gas pipelines follows its consultation over August and September on measures to improve transparency in the eastern and northern Australian gas markets.

That consultation focused on options to address a range of 'information gaps and asymmetries' across the eastern and northern Australian gas markets that were identified in recent reviews by the ACCC, the Gas Market Reform Group and the AEMC.

COAG is expected to release a decision RIS in February 2020. This will identify a preferred course of action, taking into account the submissions received during the consultation process. It has indicated that any new transparency measures would come into effect in November 2020.

COAG's decision RIS may be informed by the ACCC's eighth interim report in its Gas Inquiry 2017–2020, which the ACCC is due to release in December 2019. The interim report is expected to provide further updates on pricing, supply and demand experienced across the domestic market.

Next steps

Stakeholders who are interested in COAG's consultation RIS on the regulation of gas pipelines should consider:

• attending one of the stakeholder meetings in late November; and/or
• providing a submission to COAG – noting the consultation process is open until 5pm AEDT on 20 December 2019.