The Federal Court has issued the first court-ordered civil penalties for breaches of the National Electricity Rules, demonstrating a willingness to apply an 'agreed pecuniary penalty' negotiated by regulators and respondents. This decision is important not just to the energy sector but also to businesses operating in other highly regulated industries. Government sector leader and Partner Paul Kenny (view CV) and Associate Amelia Hanscombe report.
HOW DOES IT AFFECT YOU?
- The Federal Court has handed down the first court-ordered civil penalties for a breach of the National Energy Laws, providing the first indication of the likely quantum of penalties that will apply where generators breach dispatch instructions under the National Electricity Rules.
- The penalties ordered by the court reflect a negotiated pecuniary penalty amount proposed jointly by the Australian Energy Regulator and the respondent in the proceedings, Snowy Hydro Limited. In agreeing to apply the proposed penalties, Justice Beach indicated that the court should look favourably on negotiated settlements, provided that their terms recognise that the ultimate responsibility for making the orders lies with the court.
- This approach reflects a strengthening view of the Federal Court that, in addition to savings in time and costs, there is a public benefit in imposing agreed pecuniary penalties where appropriate. This is in contrast to the current view of the Victorian Supreme Court of Appeal, which has described judicial 'rubber stamping' of agreed pecuniary penalties as 'plainly wrong'.
- Despite divergent views of the Victorian and federal jurisdictions, Justice Beach's decision goes some way in suggesting that regulators can and should seek to agree proposed penalty amounts with regulated entities in the context of the National Energy Laws. The reasoning will apply equally to other industry sectors that are subject to oversight by independent regulators.
- The court also ordered by consent that an independent expert be appointed to review the generator's internal management documents for compliance with dispatch instructions, along with the generator providing an enforceable undertaking. These are the first remedies of this nature to be ordered by a court in relation to the National Electricity Laws, suggesting that regulators and courts alike will look to a variety of measures, in addition to civil penalties, to remedy compliance issues.
In July 2014, the Australian Energy Regulator (the AER) instituted proceedings against Snowy Hydro Limited in the Federal Court of Australia, alleging that on a number of occasions in 2012 and 2013, Snowy Hydro contravened the National Electricity Rules (the NER) by failing to comply with dispatch instructions issued by the Australian Energy Market Operator (AEMO).
AEMO issues dispatch instructions to generators such as Snowy Hydro in five-minute intervals, based on offer prices and other market conditions. There is a statutory obligation on generators to follow dispatch instructions, unless to do so would be a hazard to public safety or materially risk damaging equipment.
On 12 February 2015, the AER and Snowy Hydro reached settlement and sought consent orders from the Federal Court. By consent, Justice Beach declared that Snowy Hydro had breached the NER on nine separate occasions and ordered that it:
- engage an independent compliance expert to review the accuracy of Snowy Hydro's internal management documents for compliance with dispatch instructions;
- pay civil penalties totalling $400,000; and
- pay $100,000 to the AER as a contribution to its legal costs.
FIRST ENFORCEMENT ORDERS UNDER THE NATIONAL ENERGY LAWS
Although by consent, Justice Beach's orders were the first court-ordered penalties for a breach under any of the national energy laws,1and only the second time the AER has brought proceedings for a civil penalty order under those laws. In the past, the AER has directly issued its own infringement notices for breaches of the NER dispatch rules, which attract a significantly lower penalty limit ($20,000) in comparison to the maximum pecuniary penalty a court may order ($100,000).
It is also the first occasion that the court has addressed the quantum of penalties to be imposed for a breach of dispatch instructions. The penalty amount Justice Beach agreed to apply to each contravention (between $40,000–$60,000) will provide some future guidance to both the AER and regulated entities as to the range of penalties that may be applicable for particular breaches of the NER.
The court also took the unusual step of ordering by consent that Snowy Hydro appoint an independent expert to review its internal management documents for compliance with dispatch instructions. In conjunction with this order, Snowy Hydro provided an enforceable undertaking to the AER regarding the operation of its generating units under certain conditions. The undertaking is the first enforceable undertaking accepted by the AER under the provisions of the National Electricity Law, and, as far as we are aware, it is the first appointment of an independent compliance expert for this purpose.
The AER's pursuit of proceedings against Snowy Hydro also sends a clear signal to market participants that compliance with dispatch instructions is a key focus of the AER's enforcement activity.2 The appointment of an independent expert, and acceptance of an enforceable undertaking, suggests the AER will consider a range of non-punitive but corrective measures to achieve acceptable outcomes, in addition to pecuniary penalties.
As was the case with this proceeding, it is not uncommon for a regulator to negotiate with a respondent to an enforcement action in order to prepare an agreed statement of facts and agreed pecuniary penalty to submit to the court. While it is always a matter for the court to determine the quantum of any pecuniary penalty and other relief that should be ordered, the outcome of this proceeding continues the Federal Court's previous practice of approving agreed pecuniary penalties where it will conclude proceedings as efficiently as possible and ensure justice is done between the parties.3
In this instance, Justice Beach was clearly willing to accept the parties' agreed statement of facts and proposed pecuniary penalties, provided the court undertook a considered analysis of the appropriateness of the amount. Recognising that there is considerable public benefit in imposing agreed pecuniary penalties, Justice Beach summarised the following principles as relevant to the court's assessment of negotiated settlements:
- it is for the court to determine the appropriate penalty;
- determining the quantum of a penalty is not a precise 'science';
- the view of the regulator (as a specialist body) is relevant but not determinative;
- in determining whether the proposed penalty is appropriate, it is necessary to examine all of the circumstances of the case, requesting further evidence if necessary;
- where the parties have put forward an agreed statement of facts, that can be acted on if it is appropriate to do so; and
- where the parties have jointly proposed a penalty, it may not be useful to investigate whether the court would have arrived at that precise figure in the absence of agreement, although the court is free to do so.4
Justice Beach made it clear that the AER's view was welcome in relation to how Snowy Hydro's conduct should be assessed under the NER, stating that his decision would be 'enhanced' by knowing the AER's opinion, given its specialist technical expertise in relation to the National Electricity Market. Further, Justice Beach emphasised Snowy Hydro's acknowledgment of the contraventions and extensive cooperation with the AER during the investigation, which, he held, entitled it to a reduction of the penalty that might otherwise have been ordered.
The Federal Court's favourable approach towards negotiated settlements is not without its critics. In ASIC v Ingleby,5 the Victorian Supreme Court of Appeal rejected the Federal Court's approach to accepting agreed penalty figures as 'plainly wrong,' criticising the perceived 'rubber-stamping' of negotiated settlements. According to the Court of Appeal, there may often be a lack of transparency with negotiated outcomes, and negotiated penalties may not be adequately grounded in fact or legal principle. Further, a pecuniary penalty is by its very nature an exercise of judicial power, and an agreed figure put forward by the parties should, in the Court of Appeal's view, be regarded as nothing more than a submission.
In March 2014, the High Court delivered a judgment that tends to support the Victorian approach,6 although, given it was a criminal proceeding concerning criminal sentencing, it remains to be seen how it will impact on the consideration of civil penalties.7
The penalties and other relief proposed by the AER and Snowy Hydro and endorsed by the Federal Court represent a significant development in the national energy laws enforcement regime, which, until now, has been largely untested in court. The AER's pursuit of the proceeding plainly demonstrates that compliance with dispatch instructions will continue to be a key area of focus. We understand that, as a result of the proceeding, Snowy Hydro may pursue a broader review of the dispatch compliance rules to determine whether they are adequate for ensuring the 'safe, effective and efficient' operation of the National Electricity Market.8
Notwithstanding Justice Beach's decision, there remains some doubt as to whether negotiated settlements will be routinely accepted in future at either the state or federal level. Until the divergent views of the courts are resolved, it will be preferable for parties to put forward a suggested range of pecuniary penalties and a comprehensive statement of agreed facts in support.
Justice Beach's decision will, however, provide some encouragement, at least to the AER and its regulated entities, that agreeing pecuniary penalties for breaches of the NER may be a legitimate and efficient way to resolve disputes.