Following some extraordinary events in the Senate last week, the Government was forced back to the drawing board in relation to its Carbon Price repeal legislation by the Palmer United Party (PUP).  The contentious area of the repeal legislation is the new Part V of the Australian Consumer Law (ACL) which the repeal legislation is introducing to promote pass-through of savings by companies and to bolster the ACCC’s monitoring and enforcement powers.

Only last week, PUP proposed a number of substantial amendments to this section of the legislation imposing a positive obligation on certain energy suppliers to pass through 100 per cent of savings from the repeal, significant new penalties for non-compliance and extensive reporting obligations aimed at greater transparency and ACCC policing of pricing.

Following a further round of amendments hastily nutted out with the Government over the weekend, the revised Bill was passed by the House of Representatives last night.   The bigger test of course is whether it will be passed by the Senate.  The Government today delayed a Senate vote suggesting it is still negotiating with the crossbench on the amendments and we may yet see further changes.   Given the intended retrospective effect of many of the provisions, stakeholders and businesses are in the difficult position of needing to sift through the revisions to the Bills to try to ascertain the precise impacts of the new changes. 

What is fairly clear, from our review of the present form of the Bill (incorporating all changes to date), is that, if passed, it (and particularly the changes proposed by PUP) is likely to create a substantial headache for suppliers of electricity, natural gas and synthetic greenhouse gases to the extent that their contractual arrangements are out of step with the new obligation of complete savings pass through. 

It is also important to remember that the Government’s amendments will introduce specific new laws surrounding misleading and deceptive representations about the impact of carbon price repeal and increase the ACCC’s powers to monitor representations and pricing across all areas of the supply chain.

PUP amendments – teaching an old dog new tricks

When introducing the carbon price in 2012, the Greens and Labor specifically elected not to interfere with the rights of commercial parties to negotiate the terms of the carbon cost pass-through.  Instead the only restriction on how parties passed through the costs was the existing prohibition against misleading and deceptive conduct in trade or commerce under the Australian Consumer Law.  The pass-through of costs was largely left to market forces to determine and so individual contract negotiations became the frontline for determining how carbon cost pass-through would be achieved on a case-by-case basis. 

In dismantling the carbon price, the Government has adopted an approach similar to that utilised with the introduction of the GST and proposed a new Part V of the Australian Consumer Law which prohibits “price exploitation” covering any regulated supply which is made at “unreasonably high” prices, having regard to the carbon tax repeal.   Companies who do not comply will face a maximum penalty of $1.1million.

The PUP amendments take the position even further, removing the test of “unreasonably high” pricing and instead imposing a positive obligation on entities making a regulated supply to pass on all of the cost savings directly or indirectly attributable to the carbon tax repeal.  It also introduces significant new reporting obligations in the form of ‘Carbon Tax Removal Substantiation Statements’ and responses to ‘Carbon Tax Removal Substantiation Notices’ which must be provided to the ACCC.  The amendment which caused the most difficulty last week in the Senate was an additional 250 per cent penalty charge (payable to the Commonwealth) on all savings not passed through by 1 July 2015.

PUP amendments – who’s in the kennel? 

As with the Government’s original prohibitions on price exploitation, the PUP amendments to section 60C only apply to corporations making a ‘regulated supply’.  This means that the obligations to pass on all savings from repeal only apply to supplies:

  1. of electricity, natural gas and supplies of synthetic greenhouse gas (SGG) by bulk SGG importers ; and  
  2. made between 1 July 2014 and 30 June 2015 (the carbon tax repeal transition period).

The Minister retains the power to broaden the scope of application to other supplies by way of legislative instrument. 

In late changes agreed yesterday between the Government and PUP, the text of the amendments was changed to make it clear that small suppliers of SGG Equipment (such as fridges and air conditioners) would not be covered by the prohibitions on price exploitation.  

However, and importantly, the price exploitation prohibition in the new section 60C of the Australian Consumer Law, remains applicable to any entity that supplies electricity or natural gas (not simply retail supplies).  Therefore on-sellers of electricity such as owners of shopping centres and other large commercial buildings will also be required to pass on all savings (direct and indirect) from the repeal (and subject to penalties for non-compliance).   This nuance of the revised legislation does not seem to have been widely understood with many commentators incorrectly reporting that these on-selling entities are now exempt from all obligations.

The other major aspect of PUP’s amendments are the new concepts of ‘Carbon Tax Removal Substantiation Notices’ and ‘Carbon Tax Removal Substantiation Statements’.  In changes agreed over the weekend, both of these obligations will now apply only to electricity and natural gas retailers and to bulk importers of SGGs (see below for more details), thereby reducing the compliance burden on small and medium businesses (such as fridge and air conditioner suppliers and on-sellers of electricity).

PUP amendments – there’s bark, but will they bite?

The PUP amendments seek to ensure that price increases that have been passed on to energy customers as a result of the carbon price (however large or small that may be) are reversed in full.  Energy suppliers hoping to absorb the savings will now find this very difficult to achieve.   

While the Government has played down the scope of the amendments as largely matters of ‘semantics’, when one reviews the fine print, it is clear that the changes represent a fundamental shift in focus.   No longer is there simply a prohibition on suppliers being ‘unreasonable’ in their pricing and pass through practices.  Instead we now see a positive obligation to pass through all savings (with the reasonableness test removed) and a detailed reporting and penalty regime built-in to support compliance.  This is significant change that is likely to be welcomed by consumers as well as large commercial energy consumers and will be causing some discomfort amongst energy retailers.

In terms of the new reporting obligations that are applicable to electricity and natural gas retailers and bulk SGC, these will require, within 30 days of the repeal legislation receiving the Royal Assent:

  1. the ACCC to issue all electricity and natural gas retailers and bulk importers of SGGs with ‘Carbon Tax Removal Substantiation Notices’ explaining the provisions and requiring the entity (within 21 days) to explain the effect of the repeal on its supply input costs and how these are reflected in its pricing; and  
  2. electricity and natural gas retailers and bulk importers of SGGs to provide to the entity a ‘Carbon Tax Removal Substantiation Statements’ setting out and substantiating the costs savings by way of an average annual percentage price or an average annual dollar price basis  
  3. electricity and natural gas retailers (and excluding bulk importers of SGGs) to prepare a statement to customers  explaining the estimated savings for this financial year and, within the next 30 days (ie within 60 days after the Royal Assent) ensure that the contents of the statement is communicated to each customer. 

In the Bills before the Senate last week, the above reporting obligations had been staggered and the ability of the ACCC to issue ‘Carbon Tax Removal Substantiation Notices’ had been discretionary.  The changes made over the weekend to tighten the timeframe to 30 days after Royal Assent and require the ACCC to issue notices to all retailers is likely to allow politicians to explain the real financial impact of the repeal sooner rather than later (at least in respect of electricity bills). 

Having said that, the ACCC and the relevant retailer entities will be exchanging ‘Carbon Tax Removal Substantiation Notices’ and ‘Carbon Tax Removal Substantiation Statements’ on the same day which hardly seems helpful in terms of the retailers wishing to avoid mistakes and inconsistent reporting. If this aspect of the legislation is not amended to correct this timing issue, then for practical purposes retailers will need to understand the supply input cost impact in detail before being in a position to provide the ‘Carbon Tax Removal Substantiation Statement’ to effectively pre-empt the ‘Carbon Tax Removal Substantiation Notice’ from the ACCC. 

The PUP amendments do not change the new section 60K which the Government proposed as part of the repeal package.  Section 60K involves a specific prohibition against making false or misleading representation about the effect of the carbon price or its repeal on the price of goods or services during the carbon tax repeal transition period (1 July 2014 to 30 June 2015).  It is applicable to all corporations supplying goods or services or promoting the supply of goods or services.   This provision will therefore affect all parties within the supply chain. 

Contraventions of the ‘price exploitation’ provision in section 60C and the new misleading and deceptive conduct provision (specifically related to the carbon tax repeal) in section 60K may also result in a penalty of up to $1.1 million for corporations and may result in infringement notices from the ACCC with penalties up to $102,000 for non-compliance by listed companies.

Under the Government’s proposed amendments there are already provisions providing the ACCC with powers to monitor pricing that is offered to customers and these extend retrospectively.   It is worth noting that on 18 February 2014, the Treasurer also issued a direction to the ACCC to monitor prices, costs and pricing of energy retailers pursuant to the general powers of price monitoring under the existing section 95ZE of the ACL.   In April 2014, the ACCC reported that it had issued 37 voluntary information requests to retail electricity suppliers and 99 to natural gas suppliers and was considering those responses.

PUP’s Penalties

In addition to the above broad ranging obligations and penalties, the PUP amendments also include specific additional and increased penalties in relation to energy suppliers. 

Non-compliance with the obligation to pass-through all of the savings under section 60C (applicable to all energy, natural gas and SGG suppliers) will result in a penalty charge of 250 per cent of the savings not passed on to customers by 1 July 2015 and payable to the Commonwealth .  The ACCC has been enlisted to assist in the collection of these penalties and is required to report to Parliament in respect of penalties payable by entities.  

The weekend negotiations between PUP and the Government has also resulted in increases between 100 per cent and 500 per cent in relation to the contraventions of the reporting obligations.  Failure to provide a suitable response within 21 days to a Carbon Tax Removal Substantiation Notice issued by the ACCC will result in maximum fines of $34,000 for corporations.  Failure to provide a suitable Carbon Tax Removal Substantiation Statement within 30 days of Royal Assent will result in a maximum fine of $85,000 and a failure to provide a statement to customers will result in a maximum fine of $68,000 (presumably per contravention which could add up to a substantial liability given the large class of energy customers).  These offences are all strict liability offences.

PUP amendments – throwing a bone to large commercial energy consumers

In recent times, Gadens has observed that energy retailers have been offering ‘carbon inclusive’ fixed prices to large energy consumers for new forward contracts (usually of 1-3 years duration). 

In a more traditional ‘carbon exclusive’ pricing model, the retailer retains the ability to pass through all of its carbon costs.  Prudent customers have also negotiated obligations under this model requiring the retailer to pass through its savings in the event of repeal.   The ‘carbon inclusive’ model, on the other hand, involves a total ‘fixed price’ without the ability of the retailer to pass through carbon costs nor any obligation to pass through savings.  Instead the retailer has assumed the risk (and potential reward) in relation to legislative change and the price already factors in a ‘carbon cost’ but at a discounted rate to the $25.40 per tonne cost in this financial year. 

In basic terms, if the Government is successful in repealing the carbon price, the savings will only be required (contractually at least) to be passed through for those on ‘carbon exclusive’ contracts.

It will be interesting to see how the ACCC approaches these different methods of pricing adopted by the energy retailers, in the face of the PUP amendments.  Whilst contracts may have been signed before 1 July 2014 (when the price exploitation prohibitions will be retrospectively applied) the prohibition refers to the time when supplies are made and so retailers will still need to comply with this legislation notwithstanding that pricing had been agreed prior to the date of making the supply. 

It would seem that, under the Government’s original approach, the energy retailers might not have drawn the attention of the ACCC provided the ‘carbon inclusive’ pricing was not ‘unreasonably high’ (the original wording of section 60C) having regard to all the circumstances (ie incorporating a reasonable uplift for the energy retailer bearing that risk burden). 

However, the PUP amendments clearly shift the risk to the energy retailers to pass through all of the savings and to substantiate those savings and its own costs.  Under section 60C(3)(b) of the amendments, the ACCC will need to consider “how the cost savings…can reasonably be attributed to the different supplies that the corporation makes”.  Energy retailers will likely argue that the carbon inclusive model is an equally valid method of attributing the savings differently across the market, however, unless they can demonstrate that all the savings are being distributed (once the retailer’s internal costs are discounted) then the ACCC may consider the ‘carbon inclusive’ pricing model contravenes the new requirements to pass through savings under the PUP amendments.

Don’t let sleeping dogs lie – what the changes mean for you

  • For energy suppliers, the changes introduce some considerable new obligations in terms of passing through savings and a 250 per cent penalty for non-compliance.  For retailers and bulk importers of SGGs, the substantiation and reporting requirements are extensive.   The impacts on these entities have been discussed above, but there will obviously be a need for considerable sophistication and transparency in the calculation and reporting of costs and savings (certainly more so than when the carbon price legislation first commenced).   
  • For companies and individuals that are involved in carbon-intensive supplies other than electricity, natural gas and SGGs, the savings pass-through obligation will not directly apply (unless the Minister expands the scope of application).  However, these companies will need to be careful not to contravene the specific prohibition (see the proposed new section 60K of Part V of the ACL) against false or misleading representations for the next financial year in relation to the impact of the carbon price or its repeal.   The PUP left these Government-proposed amendments unchanged.  
  • Given the low threshold for what may constitute a ‘representation’, the most prudent approach would therefore be to avoid making representation about the impact of the carbon price repeal on price changes or supplies altogether.  Of course, this is not always practical and so when the impact of the carbon price repeal does need to be mentioned or explained it is incumbent on companies to be fully informed as to the impact and effect of the repeal on their supply and to accurately convey this to customers.   
  • In order to do this, companies will need to understand both the direct and indirect impact of the carbon price repeal throughout the supply chain.   The greatest risk may therefore rest with companies in the middle of the supply chain such as distributers as they will need to understand the embedded costs within the supply and how upstream suppliers are unwinding that component.  From a commercial perspective, it will be important that customers ensure that savings are being passed on and seek more transparency from upstream providers.     
  • For now all eyes are on the Senate to see whether the repeal legislation will undergo any further changes and whether it will be passed into law.