An extract from The Energy Regulation and Markets Review - Edition 10
Regulationi The regulators
The key national Australian authorities with specific energy regulation responsibilities are:
- Energy National Cabinet Reform Committee (ENCRC): established in 2020 as part of the establishment of the NFRC, which replaced the Council of Australian Governments. The ENCRC is tasked with delivering on the key reform priorities of the National Cabinet and does so through direct oversight of key national energy market institutions.
- Energy Security Board (ESB): established in 2017 to coordinate the implementation of the recommendations of the Finkel Review of the NEM. The ESB is also tasked with providing whole-system oversight for energy security and reliability.
- Clean Energy Regulator (CER): the Commonwealth body responsible for administering legislation designed to reduce carbon emissions and increase the use of clean energy, including the RET. It also has a role in collecting, analysing, assessing, providing and publishing information and data relating to carbon emissions and abatement, including administration of the National Greenhouse and Energy Reporting scheme that provides a framework for reporting and disseminating company information about greenhouse emissions and energy production and consumption.
- Australian Energy Markets Commission (AEMC): an independent Commonwealth statutory body with two primary roles: making and amending rules for the NEM, elements of the natural gas market and related retail markets; and providing strategic and operational advice to the ENCRC. The National Electricity, gas and retail rules made by the AEMC have the force of law.
- Australian Energy Market Operator (AEMO): oversees the operation and security of electricity and gas markets across Australia, including the NEM, the Wholesale Energy Market (WEM) in Western Australia and various short-term gas trading markets and pipeline markets in the east coast interconnected system. AEMO also has a role in system planning, including transmission network planning and long-term planning via forecasting and scenario analysis.
- Australian Energy Regulator (AER): operates across all Australian jurisdictions, except Western Australia. Its responsibilities include: economic regulation of electricity networks and covered gas pipelines in all jurisdictions except Western Australia; monitoring compliance and enforcement of key electricity and gas rules; and assessing applications for retail authorisations and exemptions, except in Victoria.
- Australian Competition and Consumer Commission (ACCC): has an ongoing monitoring and policy role in energy through ongoing electricity and gas enquiries. It also has an enforcement role in relation to the Electricity Retail Industry Code and Part XICA of the Competition and Consumer Act 2010 (the CCA) that prohibits misconduct in the electricity market and is working on a Consumer Data Right in relation to energy.
In addition to these national authorities, the economic regulatory authority in each state and territory jurisdiction has some energy regulatory role. These roles include a relatively minimal oversight and reporting role undertaken by the Independent Pricing and Regulatory Tribunal in NSW, an extensive retail regulation and consumer role by the Essential Services Commission (ESC) in Victoria, and a wide-ranging economic regulatory and enforcement role undertaken by the Economic Regulation Authority (ERA) in Western Australia.
Other non-sector specific regulatory authorities also have a role in overseeing the operations of energy companies. This includes workplace health and safety authorities, environmental protection agencies, planning authorities and the Australian Securities and Investments Commission (ASIC) (see Section II.ii).ii Regulated activities
Almost all activities involving connection to or the supply of electricity or gas through interconnected gas and electricity systems in Australia require regulatory approval. The key regulatory approvals required for engaging in energy supply activities are:
- Energy retailing: In all jurisdictions, a non-exempt person must be authorised or licenced to supply gas or electricity to end customers. In Queensland, the Australian Capital Territory, Tasmania, South Australia and New South Wales, authorisation is granted by the AER under the under the National Energy Retail Law (NERL). To apply for and receive an authorisation under the NERL, a retailer must demonstrate to the AER their organisational and technical capacity, financial viability and suitability. Energy retail licences are granted by the relevant state regulators, ESC in Victoria and the ERA in Western Australia, which apply similar criteria as under the NERL in assessing licence applications. Electricity retailers must also be authorised by AEMO as market customers to purchase wholesale electricity for supply to customers in the NEM and WEM. Applicants for authorisation must demonstrate organisational capability, financial viability and regulatory compliance.
- Electricity networks (transmission and distribution): Electricity network providers are governed by state-specific legislation that grants them powers to construct, operate and maintain their networks. Each state also maintains a licensing framework for electricity networks and monitors compliance with these licences. A person who owns, operates or controls an electricity network must also register with AEMO as a network service provider.
- Electricity generation: Authorisation from AEMO is required to operate grid-connected electricity plants. Applicants for authorisation must demonstrate their operational capability, financial viability and regulatory compliance. Qualifying generating units must be classified as scheduled, non-scheduled or semi-scheduled depending on how the generating unit participates in central dispatch. A standing exemption from this authorisation requirement is available for some generators with a capacity of less than 5MW and other exemptions are available on application. In Victoria, Queensland, South Australia, the Australian Capital Territory and Tasmania, a generator must also apply for authorisation in each of those particular states, as well as the National Electricity Market authorisation. In New South Wales, separate approval from the state body is not required. The controlling body of an entity that has operational control of a facility that exceeds the greenhouse gas emissions reporting thresholds under the National Greenhouse and Energy Reporting Act 2007 (Cth) must register with the CER and report emissions.
- Gas pipeline: A licence is required for construction and operation of gas pipelines. Licensing (and monitoring of compliance with licence conditions) is done at a state level, under state-specific legislation. Registration with AEMO is also required for participation in certain regulated gas markets, including a declared wholesale gas market or a short-term trading market.
- Trading of electricity derivatives and financial instruments: Some businesses trading in electricity or other energy derivatives may have to apply to ASIC for an Australian financial services licence (AFSL). Licence holders have a general obligation to provide financial services efficiently, honestly and fairly. Parties wishing to participate in electricity reallocation transactions or participate in a settlements residue auction in the NEM must also register as market participants with AEMO.
In addition to these requirements, constructing major energy facilities such as a grid-scale generator will require planning and development consents, which are issued under state law and local planning schemes. Planning permits usually impose a number of conditions on the applicant. Construction of such facilities also generally requires environmental licences, permits and approvals, which are administered under state regimes. Additional approval may be required under the Environmental Protection and Biodiversity Conservation Act 1999 (Cth), if the facility will have an impact on a matter of national environmental significance.iii Ownership and market access restrictions
While Australia generally welcomes foreign investment, there are extensive restrictions on foreign ownership of Australian companies or assets. This is particularly so in the power sector given the critical nature of this infrastructure.
Approval from the Foreign Investment Review Board (FIRB) is required for a wide range of transactions involving 'foreign persons'. The main laws that regulate these transactions are the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Acquisitions and the Takeovers Regulation 2015 (Cth) (FATR), and more recently the Security of Critical Infrastructure Act 2018 (Cth).
Transactions that are typically relevant to the energy sector include:
- acquisition by a foreign person of an interest of 20 per cent or more in Australian entities;
- acquisition of an interest in Australian land, including (among others) a freehold interest, a lease or licence that is reasonably likely to exceed five years, and an interest in a share or unit of an entity where Australian land makes up more than 50 per cent of the assets of the entity;
- acquisition by a foreign government investor of an interest in an Australian company, unit trust or business;
- acquisition by a foreign person of an interest in a 'national security business' or a foreign person starting a 'national security business'; and
- acquisition by a foreign person of an interest in 'national security land'.
Categories (a) and (b) are subject to a monetary threshold depending on the nature of the interest being acquired and the jurisdiction of the relevant foreign person. The standard monetary threshold is A$275 million, which applies to most business acquisitions and acquisitions of interests in Australian-developed commercial land by private foreign investors. Higher monetary thresholds apply in some circumstances for certain partner jurisdictions: Canada, Chile, China, Hong Kong, Japan, Mexico, New Zealand, Peru, Singapore, South Korea, Vietnam and the United States.
If an action has been taken or a transaction completed without obtaining the necessary FIRB approval, the Treasurer may make divestment and unwinding orders. Significant criminal and civil penalties may also apply to corporations and individuals who breach these rules.
Additionally, over recent years, Australia has implemented a suite of statutory reforms aimed at strengthening and buttressing national security interests with a particular focus on critical infrastructure and energy security. These reforms are aimed at giving the Commonwealth government greater control over foreign investment and participation in the infrastructure, more flexibility to impose specific conditions on foreign investments through the foreign investment review process, clear reporting obligations regarding ownership and control of critical infrastructure, and new obligations and corresponding offences regarding foreign influence and foreign interference.
The Security of Critical Infrastructure Act 2018 (Cth) (SCI Act) came into force on 11 July 2018. The SCI Act provides greater scrutiny of the ownership and operations of certain 'critical infrastructure' assets. Critical infrastructure assets include electricity generators above specific jurisdictional megawatt thresholds and electricity transmission networks or distribution systems that ultimately service at least 100,000 customers. The SCI Act is administered by the Critical Infrastructure Centre, within the Department of Home Affairs (CIC). When a FIRB application has been submitted which concerns one of Australia's critical infrastructure assets, the CIC is consulted to provide 'early and national security advice to inform the Treasurer's decision' on the proposal. The CIC will consider possible risks to Australia's national security if the proposal is accepted, specifically regarding risks of sabotage, espionage and coercion.
Further, transactions in the energy sector are subject to the generally applicable prohibition in Section 50 of the CCA that prohibits mergers and acquisitions that have the effect or likely effect of substantially lessening competition in any market in Australia. The CCA, including Section 50, is enforced by the ACCC. The ACCC has a history of closely scrutinising transactions in the electricity sector, including its public opposition of the acquisition of two major baseload generators by AGL in 2003 and 2014. The ACCC's opposition of both transactions was subject to successful challenges by AGL in the Federal Court and Australian Competition Tribunal, respectively.
In its report following its 2018 Retail Electricity Pricing Inquiry, the ACCC raised concerns about perceived competition issues arising from what it considered to be high levels of concentration in generation markets. Reflecting these concerns, and its past lack of success in prosecuting its opposition to mergers involving generators, its first recommendation in this inquiry was that the National Electricity Law should be amended to prevent any acquisition or transaction that would result in a market participant owning or controlling dispatch of more than 20 per cent of generation capacity in any NEM region or across the whole NEM. This recommendation was accepted in principle by the former COAG Energy Council, which conducted public consultation on its implementation in early 2019. There has been no public update on the status of the implementation of this recommendation since that consultation.
Restrictions also apply to vertical integration by electricity network operators and gas pipelines:
- Electricity networks: Network service providers are required to comply with 'ring-fencing guidelines' published by the AER. Under these guidelines, a network service provider is effectively limited to providing network services, and is prohibited from engaging in contestable generation or retail activities (although a related entity may engage in these activities). The ring-fencing guidelines also include a range of 'functional separation' measures directed at preventing discrimination in favour of related businesses operating in contestable markets – these include restrictions on the sharing of office space, staff sharing and information flows.
- Gas pipelines: Under the National Gas Law, there are restrictions on vertical integration by 'covered' pipeline service providers. A covered pipeline is a pipeline to which a 'coverage determination' applies, meaning that it is subject to greater regulatory oversight. Where a coverage determination applies to a pipeline, the service provider is prohibited from carrying on a related gas production or retail business. Restrictions also apply to sharing of staff between a covered pipeline service provider and associate entity that is engaged in gas production or retail activities.
The potential requirement for FIRB approval for changes of control in and assignments of energy companies and assets is detailed in Section II.iii.
It is standard practice for FIRB to consult with the ACCC about the potential competition impacts of any notified transaction as part of FIRB's consideration as to whether the transaction is contrary to the national interest. Because of this practice, it is often advisable for parties to separately approach the ACCC to provide information and submissions relevant to the ACCC's assessment of any competition impacts.
For transactions where FIRB notification is not required, parties are able to make an independent decision as to whether notification to the ACCC is appropriate. Notification of merger transactions to the ACCC is voluntary, although the ACCC has a range of tools to enforce merger control laws, including the ability to seek an injunction in court to restrain potential transactions on competition grounds. The ACCC strongly recommends that parties notify transactions where post-transaction market shares would be above 20 per cent in any market. The ACCC also recommends that significant transactions in sensitive industries (including energy) be notified.
Some specific energy authorisations and licences require change of control transactions to be notified to the relevant regulatory authority. This includes electricity generation licences issued by state authorities, electricity and gas retail licences issued by the ESC in Victoria and authorisations provided by AEMO for participation in the WEM. If a change of control transaction has an impact on any of the matters underpinning the grant of an authorisation or licence of any form (e.g., operational or financial capacity) then notification should be made to the relevant authority.