Legal framework

Policy and law

What is the government policy and legislative framework for the electricity sector?

Scope of the responses

These responses relate to the National Electricity Market in Australia.

Although brief reference is made to the electricity markets in Western Australia and the Northern Territory in question 2, the National Electricity Market is the predominant electricity market in Australia, operating as an interconnected electricity network across the states of Queensland, New South Wales, Victoria, South Australia, Tasmania, and the Australian Capital Territory

The National Electricity Market is one of the longest alternating current systems in the world, covering approximately 4,500 kilometres.

Policy and framework

The policy underlying the National Electricity Market is contained in the National Electricity Objective as set out in section 7 of the National Electricity Law.

The National Electricity Objective is as follows:

The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to:

price, quality, safety, reliability and security of supply of electricity; and

the reliability, safety and security of the national electricity system.

The legislative framework for the National Electricity Market is contained in the following legislative scheme:

  • National Electricity (South Australia) Act 1996;
  • the National Electricity Law;
  • the National Electricity Rules (Rules); and
  • the legislation of the other participating jurisdictions that adopt each of the above, subject to certain derogations.
The Rules

The Rules have the force of law in each participating jurisdiction in the National Electricity Market.

The prescribed requirements and tests for the making of the Rules are set out in Part 7 of the National Electricity Law.

A person is entitled to submit a Rule change request to the Australian Energy Market Commission (AEMC).

Under the National Electricity Law, the AEMC may only make a Rule if it is satisfied that the Rule will, or is likely to, contribute to the achievement of the National Electricity Objective.

Retail energy regulation in the National Electricity Market

The National Energy Customer Framework (NECF) regulates the retail supply and distribution of electricity to customers.

NECF has been adopted for the retail supply of electricity in South Australia, New South Wales, Tasmania, the Australian Capital Territory and Queensland. In Victoria, the Essential Services Commission has harmonised Victoria’s energy regulations to be substantially consistent with the NECF.

2Organisation of the market

What is the organisational structure for the generation, transmission, distribution and sale of power?

Organisational structure

The Australian Energy Regulator (AER) was established under the Competition and Consumer Act 2010 (Cth) (CCA).

AER’s functions and powers are regulatory in nature, including:

  • monitoring compliance with the National Electricity Law and the Rules and instituting and conducting proceedings;
  • making and monitoring compliance with network revenue or pricing determinations; and
  • regulating retail electricity markets under NECF.

The functions and powers of the AEMC include, primarily, the Rule-making functions and powers as prescribed under the National Electricity Law.

The AEMC must establish a panel known as the ‘Reliability Panel’, which has responsibility for matters including the monitoring, reviewing and reporting on the safety, security and reliability of the national electricity system.

The statutory functions of the Australian Energy Market Operator (AEMO) primarily involve:

  • the operation and administration of the wholesale exchange in the National Electricity Market; and
  • maintaining and improving power system security, planning for the development of the transmission grid and providing ‘shared transmission services’ by means of each participating jurisdiction’s transmission system.
Operation of the National Electricity Market

The National Electricity Market is an ‘energy-only’ wholesale electricity market. Generators recover operating and capital investment costs over time by means of the sale of electricity through spot and contract ‘markets’. Generators do not currently receive any payments for capacity or availability.

AEMO runs a central dispatch process every five minutes, which determines the electricity each generator must dispatch to meet demand. The highest priced offer required to meet demand represents the dispatch price. A separate spot price is set for each region of the National Electricity Market.

The volume and price of electricity in each five-minute dispatch period varies. Generators participate in the central dispatch process by submitting dispatch offers in up to 10 price bands.

Generators and customers in each region sell and buy electricity at the wholesale (spot) price for that region, determined as an average dispatch price over 30 minutes. All ‘dispatched’ generators receive the same price for electricity in that 30 minute period.

The principal customers are energy retailers, which bundle electricity with network services for sale to residential, commercial and industrial energy users.

Networks

The transmission and distribution networks in the National Electricity Market are structured as a series of natural monopolies (both government and privately owned) which are subject to economic regulation of price and revenue, and at the transmission functional level, regulated rights of access.

Chapter 6 of the Rules (for distribution) and Chapter 6A of the Rules (for transmission) set out the regulatory framework for the AER to apply in the economic regulation of transmission and distribution network service providers.

Western Australia

Western Australia has two separate electricity networks, known as the South West Interconnected System (SWIS) and the North West Interconnected System (NWIS).

The SWIS is a ‘capacity’ market. Generators and demand-side management service providers are paid for the capacity they can provide to the market when required. AEMO determines the capacity required each year and issues ‘capacity credits’ (being notional units of generational capacity) to market participants registered as generators under the SWIS Market Rules. Retailers and large-load customers are required to purchase a quantity of capacity credits in accordance with their capacity allocation.

A capacity credit can be traded between market participants and is valid for a particular reserve capacity year (as defined in the Market Rules).

Northern Territory

The Northern Territory has an independent electricity network and supply industry that is primarily administered by the Utilities Commission of the Northern Territory. However, as part of a recent reform process, the AER has been given responsibility for network price regulation and oversight of network access.

Regulation of electricity utilities – power generation

Authorisation to construct and operate generation facilities

What authorisations are required to construct and operate generation facilities?

The authorisations required to construct and operate generation facilities include a combination of the following:

  • environmental, planning and works approvals under state (and potentially federal) environment protection and state planning legislation;
  • the grant of environment protection licences and approvals for the operation of the generation facility under state (and potentially federal) environment protection legislation;
  • the grant of a generation licence by the relevant state regulator under state electricity legislation; and
  • for the purposes of the National Electricity Market, as required pursuant to section 11 of the National Electricity Law, registration under the Rules (unless a prescribed exemption is applicable).
Grid connection policies

What are the policies with respect to connection of generation to the transmission grid?

The policies are summarised and discussed in the responses to questions 1 and 9.

Alternative energy sources

Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?

Federal and state government policy and legislation encourages power generation based on renewable energies. For example:

  • The federal government signed the Paris Agreement. This agreement was made within the framework of the United Nations Framework Convention on Climate Change. Australia has set an emissions reduction target of 26 to 28 per cent on 2005 levels by 2030.
  • The Renewable Energy (Electricity) Act 2000 (Cth) introduced a national Renewable Energy Target (RET) scheme requiring electricity retailers to source a proportion of their electricity from renewable energy facilities. Compliance is achieved by the retailer obtaining renewable energy certificates. The objective is for 33,000GWh (or 23.5 per cent of Australia’s electricity) to be generated by renewable energy facilities by 2020.
  • The federal government also implemented the Carbon Farming Initiative Amendment Act 2014 (Cth) to provide the framework for its Direct Action Policy (DAP). The central feature of the DAP was the establishment of the A$2.55 billion Emissions Reduction Fund (ERF) to be applied for investment in carbon abatement.
  • The Clean Energy Regulator will issue ‘Australian carbon credit units’ (ACCUs) for carbon emission reduction projects which are created and audited under approved methods. The Clean Energy Regulator may enter into contracts for the purchase of ACCUs following a ‘carbon abatement purchasing process’ to be conducted in accordance with the Carbon Credits (Carbon Farming Initiative) Rule 2015.

State legislation and ‘renewable energy action plans’ have been also introduced. For example:

  • Victoria introduced the Victorian Energy Efficiency Target Act 2007. The Victorian Energy Efficiency Target Scheme was amended to set targets for each year from 2016 to 2020. The Victorian government introduced a state-based renewable energy target of 25 per cent by 2020 and 40 per cent by 2025; and
  • In September 2013 the New South Wales government released its ‘Renewable Energy Action Plan’. The object of this plan is aligned with the object of the RET scheme.
Climate change

What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?

The National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth) (Safeguard Mechanism) was introduced by amendments to the NGER Act made by Schedule 2 of the Carbon Farming Initiative Amendment Act 2014 and commenced on 1 July 2016.

The Safeguard Mechanism applies to ‘designated facilities’, being facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (tCO2-e) per annum of direct (or ‘scope 1’) emissions, as defined in the NGER Act. The Safeguard Mechanism requires designated facilities to establish an emissions ‘baseline’ (calculated in accordance with prescribed criteria in the NGER Act, based on the highest level of emissions by the facility over the historical period between the years 2009 to 2010 and 2013 to 2014).

Once a designated facilities’ baseline has been established, the Safeguard Mechanism imposes a requirement on the person with operational control of the facility (as determined in accordance with NGER Act) to ensure emissions from the facility remain under that baseline.

However, the electricity sector has been given special treatment under the Safeguard Mechanism, so that a ‘sectoral baseline’ has been set for electricity generation facilities that are connected to any of Australia’s major electricity networks. The sectoral baseline for the electricity sector is 198 million tCO2-e.

As part of the annual National Greenhouse and Energy Reporting data, the Clean Energy Regulator will publish the total scope 1 emissions for all grid-connected generators. The most recent data published by the Clean Energy Regulator calculated the total scope 1 emissions for grid-connected generators for 2016-2017 to be 176.2 million tCO2-e.

Under the Safeguard Mechanism, the ‘sectoral baseline’ approach will apply unless the total of eligible direct emissions exceeds the baseline in any financial year. If the sectoral baseline is exceeded, baselines for individual facilities will apply in place of the sectoral baseline.

If a facility’s emissions exceed (or are expected to exceed) its baseline in any financial year, the person with operational control of the facility (the ‘responsible emitter’) has a number of options available to manage the excess emissions, including:

  • applying for a calculated baseline or an emissions intensity baseline variation;
  • surrendering Australian carbon credit units (ACCUs) to offset emissions and bring net emissions below the baseline;
  • applying for a multi-year monitoring period to allow additional time to reduce emissions; or
  • applying for an exemption where emissions are due to exceptional circumstances, such as a natural disaster or criminal activity.

Under the NGER Act, the Safeguard Mechanism provides a range of enforcement options for the Clean Energy Regulator where a responsible emitter fails to take one of the above actions. These include entering into an enforceable undertaking, issuing an infringement notice, or court proceedings to seek an injunction or civil penalties.

Storage

Does the regulatory framework support electricity storage including research and development of storage solutions?

The AEMC released a report in December 2015 that examined whether the existing regulatory frameworks are sufficiently flexible to integrate energy storage technologies. There were several issues with the regulatory framework that were identified as potentially acting as barriers to the integration of storage in the National Electricity Market. However, it was also identified that batteries and storage technologies can be accommodated within the existing regulatory framework, although it has been acknowledged by the AEMC that improvements could be made to facilitate installation. For example, in many cases, a storage device can be treated as a generator having the same capacity and characteristics. Also, in relation to network regulation, storage can be classified as a contestable service.

A recent rule change will establish a national register of distributed energy sources, including small-scale battery storage, with the aim of, among other things, promoting better investment decisions. This rule will commence on 1 December 2019.

On 28 November 2017, the AEMC made a final rule to change the settlement period for the electricity spot price from 30 minutes to five minutes.

The Rule, which will take effect from 2021, will mean all settlement periods are reduced to five minutes, which will produce a more granular and more accurate price signal for investment in fast response technologies such as batteries (as well as new-generation gas-peaking plants).

In order to ensure the rule change is effective, the operational dispatch and financial settlement periods will both be aligned to five minutes, which will reduce the time interval for financial settlement in the national electricity market from 30 minutes to five minutes.

Government policy

Does government policy encourage or discourage development of new nuclear power plants? How?

Approval cannot be provided for the construction or operation of nuclear plants in Australia under either the Environment Protection and Biodiversity Conservation Act 1999 or the Australian Radiation Protection and Nuclear Safety Act 1998.

There have previous inquiries into nuclear power generation in Australia. This includes the South Australian Nuclear Fuel Cycle Royal Commission 2016. There is a current parliamentary inquiry into the prerequisites for nuclear energy in Australia (though the terms of reference indicate that the current bipartisan moratorium on nuclear energy generation will remain in place).

In 2017, the Finkel Report (see below) observed that the establishment of nuclear power would require ‘broad community consultation and the development of a social and legal licence’. Owing to the ‘strong awareness of the potential hazards associated with nuclear power plant operation, including the potential for the release of radioactive materials’, the Finkel Report concluded that any development of nuclear power technologies would require significant time to overcome the social, legal, economic and technical barriers in Australia.

Regulation of electricity utilities – transmission

Authorisations to construct and operate transmission networks

What authorisations are required to construct and operate transmission networks?

In accordance with clause 2.5.1 of the Rules, a person must not engage in the activities of owning, controlling or operating a transmission network unless that person is registered by AEMO as a transmission network service provider (TNSP).

In addition, a number of the state jurisdictions require TNSPs to be licensed (or hold an authorisation) pursuant to the state’s legislative regime for electricity regulation.

The relevant state authorisations typically include:

  • an environmental approval;
  • planning and construction approval; and
  • appropriate land rights, by way of easement, lease or licence granted by landowners over which the transmission network will pass.
Eligibility to obtain transmission services

Who is eligible to obtain transmission services and what requirements must be met to obtain access?

Clause 5.3 of the Rules specifies the process by which a registered participant or proposed registered participant may make a request to establish or modify a connection to a transmission network.

An offer to connect must be fair and reasonable and must be consistent with the safe and reliable operation of the power system in accordance with the Rules.

The TNSP and the connection applicant must negotiate in good faith to reach a connection agreement. In the event of a dispute, Part K of Chapter 6A of the Rules provides for commercial arbitration of that dispute. Technical performance standards apply to generators seeking to connect to the National Electricity Market. TNSPs are required to make decisions according to these standards.

Access

There is no ability for a generator in the National Electricity Market to secure ‘firm’ access rights to the transmission network. Accordingly, generators which are connected to the transmission network face congestion risk. The AEMC previously developed a proposed optional firm access (OFA) model, pursuant to which generators would be entitled to pay TNSPs for the right to secure ‘firm’ access, and be charged by TNSPs in accordance with the costs of providing that access to firm capacity.

The AEMC’s final report to the Standing Council of Energy and Resources concluded that the implementation of OFA would not contribute to the achievement of the National Electricity Objective, although circumstances may arise in the future where there is a need for significant additional investment where the location and type of investment is uncertain, in which benefits may be derived from an OFA.

Government transmission policy

Are there any government measures to encourage or otherwise require the expansion of the transmission grid?

There are no specific governmental (eg, tax) incentives offered for expansion or augmentation of transmission networks.

In accordance with the Rules, the AER will only approve forecast capital expenditure where the AER is satisfied that the forecast reasonably reflects, among other things, the efficient costs of meeting demand and maintaining the quality and reliability of services.

Other incentives for TNSPs in the National Electricity Market include an efficiency benefit sharing scheme (EBSS) for operational expenditure, under which the AER determines the manner in which benefits of efficiency gains are shared between network businesses and network users. In accordance with the Rules, the AER has the power to apply an EBSS to capital expenditure for both transmission and distribution network businesses.

In July 2018, significant amendments to Chapter 5 of the Rules took effect, which introduce changes to transmission connection arrangements that are broadly intended to increase transparency and contestability for connection services.

Rates and terms for transmission services

Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?

The AER must make transmission determinations for TNSPs in accordance with Chapter 6A of the Rules for prescribed transmission services and negotiated transmission services.

A TNSP is required to prepare a ‘negotiating framework’ which sets out the procedure to be followed for the purposes of negotiations to agree upon the terms and conditions of access.

In addition, the TNSP must submit to the AER a ‘revenue proposal’ and a proposed ‘pricing methodology’ relating to the transmission services provided by means of the transmission system owned, controlled or operated by that TNSP. This process involves forecasting the revenue requirements needed to cover efficient costs and provide a commercial return on capital investment.

The AER makes a final decision in respect of the transmission determination. Upon the AER making that final decision, the transmission determination will apply for a prescribed ‘regulatory control period’, being a period of not less than five years.

Section 7A of the National Electricity Law specifies the Revenue and Pricing Principles, which provide that a regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in providing direct control network services and complying with a regulatory obligation or requirement or making a regulatory payment.

The costs that a TNSP can recover are determined using the ‘building block’ approach. This approach is used to ensure that the expenditure of each transmission network service provider is amortised appropriately over time.

The maximum allowable revenue calculated using the building block methodology is converted into network prices using demand forecasts. In the case of TNSPs, the network pricing is set according to a ‘revenue cap’ methodology and the AER sets the ‘maximum allowed revenue’ for each year of the regulatory control period.

Entities responsible for grid reliability

Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?

AEMO is primarily responsible for assuring reliability of the transmission grid in the National Electricity Market. The relevant powers and responsibilities are summarised in the response to question 2.

Reliability of the transmission network is determined in accordance with the standards specified in the National Electricity Law and the Rules. In particular, clause 4.3 of the Rules specifies the scope of AEMO’s responsibilities for ensuring power system security, including in relation to the transmission network.

In July 2018, AEMO produced an Integrated System Plan (ISP), which is a cost-based engineering optimisation plan that forecasts the overall transmission system requirements for the National Electricity Market over the next 20 years.

The ISP was produced in response to a recommendation from the Finkel Report (see below), and is intended to assist in planning for the National Electricity Market in light of the fundamental changes in the sources and dynamics of the Australian electricity sector.

Regulation of electricity utilities – distribution

Authorisation to construct and operate distribution networks

What authorisations are required to construct and operate distribution networks?

As with the response to question 9, subject to certain exemptions (including for embedded networks), a person wishing to engage in the activity of owning, controlling or operating a distribution system must be registered by AEMO as a distribution network service provider (DNSP) in accordance with clause 2.5.1 of the Rules.

In addition to the requirements for registration under the Rules:

  • for a person to own and operate a distribution network, several of the state or territory jurisdictions require DNSPs to be licensed (or hold an authorisation) pursuant to the legislative regime of that state or territory for electricity regulation; and
  • the construction of a distribution network may require environmental or planning approvals in accordance with the applicable state or territory jurisdictional requirements, similar to those required for transmission network services (see question 9).
Access to the distribution grid

Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?

In accordance with Chapter 5 of the Rules, and as described in the response to question 10, a person seeking connection to a distribution network is required to make an application to the applicable DNSP in accordance with the process specified in clause 5.3 of the Rules.

Under the Rules, a person may apply to a DNSP for provision of ‘direct control’ services or ‘negotiated distribution’ services.

Access to distribution services is negotiated by the DNSP and the connection applicant in accordance with the Rules. Technical performance standards apply to generators seeking to connect to the National Electricity Market. DNSPs are required to make decisions according to these standards.

In accordance with clause 5.5 of the Rules, a DNSP must negotiate in good faith with the relevant connection applicant to reach agreement in respect of the distribution network access arrangement sought by the applicant, subject to those arrangements being consistent with good electricity industry practice.

Government distribution network policy

Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?

There are no specific governmental (eg, tax) incentives available for expansion or augmentation of distribution networks.

In accordance with the Rules, the AER will only approve forecast capital expenditure where the AER is satisfied that the forecast reasonably reflects, among other things, the efficient costs of meeting demand and maintaining the quality and reliability of services.

An EBSS for operational expenditure also applies to DNSPs (see the response to question 11).

Rates and terms for distribution services

Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?

In the National Electricity Market, DNSPs are subject to both revenue and price regulation. Pursuant to Chapter 6 of the Rules, the AER makes a distribution determination that applies to a DNSP for a regulatory control period of not less than five years.

A distribution determination imposes controls over the prices of direct control services, the revenue to be derived from direct control services, or both.

Under Chapter 6 of the Rules, the same pricing principles as described in respect of transmission network services in question 13 are applied by the AER in making distribution determinations. However, the methodology used varies as between the participating states and territories. In particular:

  • a revenue cap applies to DNSPs in Queensland and Tasmania;
  • a weighted average price cap applies to DNSPs in New South Wales, Victoria and South Australia; and
  • a maximum average revenue cap applies to the DNSPs in the Australian Capital Territory.

Regulation of electricity utilities – sales of power

Approval to sell power

What authorisations are required for the sale of power to customers and which authorities grant such approvals?

Retailers must obtain an authorisation (or licence in jurisdictions which have not adopted the NECF) unless an exemption applies. An authorisation will apply in all NECF participating jurisdictions as the AER does not have the power to limit the jurisdiction where the retailer can operate.

The AER is responsible for granting and monitoring compliance with authorisations and the NECF. In participating jurisdictions which have not implemented the NECF, the relevant state regulator is responsible. A prospective retailer must apply to the AER or the applicable state regulator for an authorisation or licence (as the case may be).

Power sales tariffs

Is there any tariff or other regulation regarding power sales?

There are two classes of mass market customer contracts: standing retail contract, and market retail contracts.

Standing retail contracts

Standing retail contracts are basic contracts for residential and certain small business customers who do not negotiate a market retail contract.

Designated retailers are obliged to offer standing retail contracts at regulated prices in some states, such as Tasmania. Substantial reforms have been recently introduced in New South Wales, Victoria, South-East Queensland and South Australia. A default market offer (DMO) price is the maximum price for standing offers which applies in New South Wales, South-East Queensland and South Australia. The Victoria default offer (VDO) is an offer which must be made available to customers by retailers in Victoria.

The standing retail contracts’ provisions are more regulated than market retail contracts, and the rights of retailers to vary the terms or rates are also limited by legislation.

Market retail contracts

Market retail contracts are negotiated between the customer and the retailer. The prices are set by the retailer, not the regulator. Market retail contracts must include the minimum terms and conditions prescribed by applicable law.

All jurisdictions participating in the National Electricity Market have full retail contestability.

Prices for the retail supply of electricity have been deregulated in South Australia, Victoria and New South Wales. Market monitoring, in place of retail price regulation, commenced in south-east Queensland on 1 July 2016.

Rates for wholesale of power

Who determines the rates for sales of wholesale power and what standard does that entity apply?

See question 2, under ‘Operation of the National Electricity Market’.

Public service obligations

To what extent are electricity utilities that sell power subject to public service obligations?

The designated retailer (being the local area retailer, where there is no connection or the financially responsible retailer, where there is an existing connection) must offer to supply electricity to small customers at the standing offer prices and under the retailer’s standing retail contract. Under the NECF there is also a ‘retailer of last resort’ scheme, which provides for the continuity of supply to customers of a failed retailer by the retailer of last resort appointed by the AER.

Under the NECF, retailers are required to develop and implement a customer hardship policy to assist customers who are experiencing payment difficulties caused by hardship to pay their energy bills. These policies must be approved by the AER.

Retailers are subject to the retailer reliability obligation (RRO) which is discussed in question 36.

Regulatory authorities

Policy setting

Which authorities determine regulatory policy with respect to the electricity sector?

Regulatory policy is determined by the Ministerial Council on Energy (taking into account reviews conducted by the AEMC) together with the economic regulatory functions and powers conferred upon the AER.

Scope of authority

What is the scope of each regulator’s authority?

See question 2.

Establishment of regulators

How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?

Each regulator is established by statute (see question 2), independent of each ‘regulated business’ and is a government body.

Challenge and appeal of decisions

To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?

There is no right of appeal from a decision by the ACCC under its informal merger review process. The potential acquirer would either seek a declaration from the Federal Court or pursue an application for authorisation (discussed further in the response to question 27).

The Competition and Consumer Amendment (Abolition of Limited Merits Review) Act 2017 (Cth), which received royal assent on 30 October 2017, abolished the limited merits review regime, which had allowed decisions regarding regulated assets to be challenged in the Australian Competition Tribunal on limited grounds (factually erroneous, incorrect or unreasonable). Now the AER’s decisions are no longer subject to merits reviews and may only be challenged on judicial review grounds in the Federal Court. In essence, judicial review is only available in limited circumstances where an error of law has been made.

Acquisition and merger control – competition

Responsible bodies

Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?

Section 50 of the CCA and the other provisions of the CCA, insofar as they relate to section 50, represent the statutory regime for the assessment by the Australian Competition and Consumer Commission (ACCC) of a potential acquisition in an electricity market in Australia.

In addition to the ACCC, the FIRB may also recommend the Treasurer not permit an acquisition of shares or assets by a foreign person in certain circumstances under the Foreign Acquisitions and Takeovers Act 1975 (FATA). See question 31 for further details.

Review of transfers of control

What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?

The informal merger review process is administrative (ie, non-statutory) in nature. However, it is supported by provisions of the CCA, including section 80(1A) (the power conferred upon the ACCC to apply for injunctive relief), section 87B (enforceable undertakings), and section 155 (information gathering powers).

The section 50 test

The test under subsection 50(1) of the CCA is whether a proposed acquisition would have the effect, or be likely to have the effect, of substantially reducing competition in any market.

This question is determined by the use of the ‘future with-and-without’ test. This test requires a consideration of the likely state of future competition in the relevant market ‘with’ and ‘without’ the proposed acquisition. The ‘without’ scenario, or ‘counterfactual’, is the likely state of affairs in the market in the absence of the proposed acquisition.

Authorisation

Following amendments to the CCA in 2017, an alternative statutory pathway for approval of a proposed acquisition of assets or shares is to obtain an authorisation by the ACCC; a decision which is subject to review by the Competition Tribunal. If authorisation is granted, section 50 of the CCA will not prohibit completion of the acquisition in accordance with the authorisation.

The test for authorisation under the CCA requires the identification and evaluation of the public benefit and public detriment likely to arise from a proposed acquisition. The most prominent public detriment will be competitive detriment. The analysis requires definition of a counterfactual and a comparison of the ‘future with’ and the ‘future without’ the proposed acquisition.

Criteria

Subsection 50(3) of the CCA sets out an inclusive list of matters that must be taken into account in assessing a proposed acquisition.

Inherent within the test in section 50 of the CCA is the question of whether a proposed acquisition would confer upon the acquirer market power in any market. In this respect, barriers to entry, expansion and exit are of primary concern.

Market power

In the context of the wholesale electricity markets, a distinction is to be drawn between sustained market power and transient market power. According to the AEMC, the concept of ‘substantial market power’ in the wholesale market should be defined as the ability of a generator or group of generators to increase annual average wholesale prices to a level that exceeds estimates of long run marginal cost, and to sustain prices at that level due to the presence of significant barriers to entry.

Market definition

Market definition is an essential first step.

In the AGL authorisation decision in 2014, the Australian Competition Tribunal confirmed the following:

  • the market for the generation and supply of electricity in the National Electricity Market is a ‘national market’ and includes hedging and other derivative contracts; and
  • the retail market for electricity is state- or region-based, with a distinction between commercial and industrial customers and mass-market customers.
Prevention and prosecution of anti-competitive practices

Which authorities have the power to prevent or prosecute anticompetitive or manipulative practices in the electricity sector?

For the purposes of the CCA, the ACCC. For the purposes of the Rules, the AER.

Determination of anti-competitive conduct

What substantive standards are applied to determine whether conduct is anticompetitive or manipulative?

Part IV of the CCA

A market participant is subject to the provisions of the CCA, including the following:

  • a contract, arrangement or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market;
  • a market participant with a substantial degree of power in an electricity market engaging in any conduct that has, or is likely to have, the effect of substantially lessening competition in a market; and
  • cartel conduct (which can be both civil and criminal in nature), which is directed towards price fixing, restricting output, allocating customers, supplies or territories, and bid-rigging.
The Rules

There is a prohibition on making a dispatch offer, dispatch bid or rebid that is false, misleading or likely to mislead. The making of the offer, bid or rebid is deemed to represent to other generators or market participants that it will not be changed unless the generator or market participant becomes aware of a change in the material conditions and circumstances on which that offer, bid or rebid is based. A rebid must be made as soon as practicable after the generator or market participant becomes aware of a change in material conditions and circumstances.

There are also requirements on generators to specify the minimum rates at which they may increase or decrease output.

Preclusion and remedy of anti-competitive practices

What authority does the regulator (or regulators) have to preclude or remedy anticompetitive or manipulative practices?

The CCA

The ACCC has significant powers conferred upon it under the CCA, including the following:

  • the ACCC has the power to apply to the Federal Court for a declaration, and divestiture where an acquisition contravenes section 50 of the CCA;
  • the ACCC can accept an enforceable undertaking pursuant to section 87B of the CCA; and
  • the ACCC has the power to apply to the Federal Court for a pecuniary penalty for each act or omission in contravention of a provision of Part IV (other than the criminal cartel provisions) of the CCA.

The Commonwealth Director of Public Prosecutions has the power to apply to the Federal Court for a fine for cartel conduct that is an indictable offence (criminal cartel conduct) determined by criteria substantially identical to those applicable to a pecuniary penalty.

In addition, in the case of an individual, a contravention of a cartel offence provision can be punishable by a term of imprisonment of not exceeding 10 years or a fine not exceeding A$220,000.

The National Electricity Law

The AER has various enforcement powers under the National Electricity Law, including that it may:

  • accept an enforceable undertaking pursuant to section 59A of the National Electricity Law; and
  • make an application to the Federal Court or the Supreme Court of a participating jurisdiction for a declaration or an injunction.

If such a declaration is ordered, that order may include an order that the person pay a civil penalty for a breach of a civil penalty provision determined in accordance with the National Electricity Law and the Rules.

The AER may serve an ‘infringement notice’ on a person that it has reason to believe has breached a civil penalty provision (other than a ‘rebidding civil penalty provision’).

The National Electricity Law contains ‘offence provisions’ a breach or contravention of which by a person exposes that person to a finding of guilt by a court.

International

Acquisitions by foreign companies

Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?

The FATA applies to the acquisition of interests in Australian businesses and assets by foreign persons. Notification under the FATA are subject to certain financial and other thresholds.

All notifiable transactions are subject to a review by the Foreign Investment Review Board (FIRB). FIRB makes a recommendation to the Federal Treasurer as to whether the acquisition is contrary to Australia’s national interest. The Treasurer makes the decision. Generally, there is a 30-day period for a decision under FATA, although this can be extended in certain circumstances, including where the applicant requests the time frame be extended.

Authorisation to construct and operate interconnectors

What authorisations are required to construct and operate interconnectors?

The rules which govern the construction and operation of transmissions assets are also applicable to interconnectors (see the response to question 9).

Interconnector access and cross-border electricity supply

What rules apply to access to interconnectors and to cross-border electricity supply, especially interconnection issues?

Not applicable in Australia.

Transactions between affiliates

Restrictions

What restrictions exist on transactions between electricity utilities and their affiliates?

In accordance with clause 6.20.2 of the Rules, the AER is required to develop ring-fencing guidelines for TNSPs (with which they must comply under clause 6.20.1 of the Rules).

The guidelines require all TNSPs to ensure legal and operational separation of their transmission business from other related businesses (for the purpose of the guidelines, a ‘related business’ includes electricity generation, distribution or retail supply). Clauses 7.3-7.5 of the guidelines require a TNSP to separate the accounting and functional aspects of regulated transmission services from the remainder of its business.

Rule 6.17 of the Rules requires DNSPs to comply with any Distribution Ring-Fencing Guidelines made by the AER. However, the Rules permit such guidelines to ‘vary in application as between different participating jurisdictions’.

Clause 6.17.2 of the Rules provides that the ring-fencing guidelines that were in force in a participating state or territory before the AER assumed regulatory responsibility (which the AER notes have been informed by ‘national competition principles’) continue to apply in that jurisdiction, unless the AER amends, revokes or replaces the guidelines.

The guidelines were published by the AER in October 2017. In August 2019, the AER commenced a process to review the guidelines, with the aim of updating them to clarify and strengthen some obligations; and to make compliance less administratively complex.

Enforcement and sanctions

Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?

See the response to question 34.

Update and trends

Key developments of the past year

Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?

Key developments of the past year36 Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?Finkel Report

Following a complete loss of power in areas of South Australia on 28 September 2016 (a ‘black system event’), the COAG Energy Council commissioned an independent review of the current state of the security and reliability of the National Electricity Market by Australia’s chief scientist, Dr Alan Finkel, who provided his final report in June 2017 (the Finkel Report).

The Finkel Report identified the poor integration of intermittent renewable electricity generators into the National Electricity Market and the unplanned withdrawal of older coal- and gas-fired generators as having compromised security and reliability. Rule changes have been implemented to address system reliability and security of the National Electricity Market including:

  • Amendments to the way that levels of performance are negotiated between DNSPs, TNSPs and connecting generators, and changes to the technical requirements of new generating systems.
  • Introduction of a retailer reliability obligation (RRO). If AEMO identifies reliability gaps in each National Electricity Market region in the coming five years. If gaps are identified, it will apply to the AER to trigger the RRO. If the RRO is triggered, ‘liable entities’ will need to enter qualifying contracts to cover their share of demand.
  • There have been amendments to enhance the reliability and emergency reserve trader. This mechanism allows AEMO to contract for emergency reserves.
AEMO dispatchable generation report

In September 2017, AEMO also provided a report to the federal government advising that there is underinvestment in the amount of flexible dispatchable generation sources needed to ensure supply reliability in the National Electricity Market, affirming many of the conclusions about National Electricity Market reliability and supply mix found by the Finkel Report.

AEMO’s recommendations to address this finding include establishing an immediate ‘strategic reserve’ of approximately 1GW of dispatchable energy to ensure supply reliability in Victoria and South Australia, and changes to National Electricity Market market design to promote more generation investment before 2021-22.

ACCC retail electricity pricing inquiry

On 11 July 2018, the ACCC released a report on retail supply of electricity and the competitive of retail electricity markets in the National Electricity Market. The ACCC report concluded that the rising retail electricity prices had been influenced by a series of factors and pressures across all stages of the electricity supply chain. The report made a total of 56 recommendations for comprehensive reform measures to all aspects of the National Electricity Market, with a focus on increasing the affordability of electricity for retail customers.

Amongst the 56 recommendations, the ACCC recommended amendments to the National Electricity Law including:

  • to prevent any acquisition that would result in a market participant owning or controlling dispatch of more than 20 per cent of generation capacity in any National Electricity Market region or across the National Electricity Market as a whole;
  • to provide the AER with powers to address manipulation of the wholesale market (along with necessary investigation powers and appropriate remedies to detect and enforce compliance with these laws); and
  • to require the reporting of all over-the-counter trades to a repository administered by the AER, so de-identified trades can be publicly disclosed (without unintentionally revealing the parties involved).

In August 2018, the then Treasurer, Scott Morrison MP, directed the ACCC to hold a long-running public inquiry to monitor the prices, profits and margins in the supply of electricity in the National Electricity Market, which will end on 31 August 2025. The ACCC released the first report on 29 March 2019.

Use of authorisations

Part VII of the CCA empowers the ACCC to grant an authorisation to a person to engage in specified conduct to which one or more provisions of Part IV would or may apply. In the light of high electricity prices in the National Electricity Market, it can be anticipated that the ACCC will issue determinations authorising members of associations to jointly tender and negotiate with electricity suppliers for lower power prices (subject to aggregate demand not exceeding a specified percentage of annual consumption in any region of the National Electricity Market).

Other proposals Energy Market Misconduct Bill

The controversial Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill 2018 has been reintroduced to parliament.

The bill contains, among others, a prohibition on offering to supply electricity to small customers where the price fails to make reasonable adjustments to reflects ‘sustained’ and ‘substantial’ reductions in underlying costs of procuring electricity. One particularly concerning aspect of this legislation is that remedies for certain types of proposed ‘aggravated’ contravention involving distortion or manipulation of prices in the electricity spot market includes divestitures.

If this legislation is passed by parliament, there remain questions as to the interpretation of key aspects of these proposed laws and how they would be enforced in practice.

Generator Closure Notice Rule

In November 2018, the AEMC finalised an amendment to the NER that creates a framework requiring generators to provide AEMO the expected closure year for all scheduled and semi-scheduled generating units. It also requires generators to provide AEMO at least three years’ notice of their intention to permanently close a generating unit by notifying the date they wish to terminate the classification of the generating unit. The rule specifies that a generator is only permitted to submit a first notice of closure with less than three years’ notice if it has obtained a written exemption from the AER.

The object and purpose of the rule change is to assist in managing the market impacts of the retirement of Australia’s existing coal-fired generation fleet in the National Electricity Market, as they reach the end of their economic lives.