Increased penalties for breach of National Energy Laws under new three-tier framework

The Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Act 2020 (SA) (the Act) was passed by the South Australian Parliament in October this year. This means that a new civil penalty and enforcement regime will form part of the National Energy Laws (that is: the National Electricity Law (NEL), National Gas Law (NGL) and National Energy Retail Law (NERL)) in NSW, Queensland, Victoria, South Australia, Tasmania and the ACT.

The three-tier penalty system introduces greater maximum penalties for individuals and body corporates, while providing the Australian Energy Regulator (AER) with more flexibility in addressing breaches of the National Energy Laws. Market Participants should be on notice for increased enforcement action by the AER. Not only will there be increased maximum penalties, but the AER will have more powers at its disposal to perform its role.

The Act was passed with no substantial departures from the Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Bill 2020 (the Bill) that was released by the COAG Energy Council, along with the draft Decision Matrix and Concept Table, for public consultation in July this year.

Although the Act has been passed, it has not yet come into effect. The Act's amendments to the National Energy Laws will come into effect on a date to be fixed by proclamation by the South Australian Parliament, however, as at the date of this article, it is not clear how soon the proclamation will be made. Our current expectation is early 2021.

The call for higher penalties

The passing of the Act marks the next step in reforms to the National Energy Laws which give effect to the recommendations of the Australian Competition and Consumer Commission's 2018 Retail Electricity Pricing Inquiry, which stated that:

"the current civil penalty amounts are insufficient to impose a credible level of deterrence and provide meaningful consequences to businesses. Therefore, the ACCC considers that the penalties should be increased to provide the [AER] with a greater level of flexibility in its response to address breaches of the national energy laws."

Overall, the changes detailed in the Act will strengthen the AER’s enforcement powers and the penalty regime under the National Energy Laws – particularly in the case of significant breaches, or breaches that impact the integrity of energy markets. The COAG Energy Council has described the proposed penalty regime as "more flexible and sophisticated [and] akin to that of the Australian Consumer Law". The COAG Energy Council has expressed the overarching aim of the reforms as to ensure that penalties for breach of the National Energy Laws are sufficient to deter contravening behaviour.

Key changes to be implemented by the Act include:

• adopting a three-tier civil penalty regime in the laws;
• increasing civil and offence penalty levels and indexing them in line with the Consumer Price Index; and
• enhancing the AER’s information-gathering powers.

The new three-tier penalty regime

Currently, the penalty rates in the National Energy Laws are not uniform, which is addressed by the Act. The Act will also increase civil penalties in the National Energy Laws through the implementation of a three-tier penalty structure.

The maximum civil penalties for each tier are set out below:

Under the Bill, it falls to the relevant Minister to classify each of the penalty provisions as Tier 1, Tier 2 or Tier 3 provisions by way of Regulations. If a provision is not prescribed as Tier 1 or Tier 2 by a Regulation, it will be a Tier 3 provision by default.

Decision Matrix for classifying civil penalty provisions

The draft Decision Matrix model is meant to guide the relevant Minister in classifying both current and future civil penalty provisions according to the three-tier framework:

The Decision Matrix is framed according to eight concepts drawn from the National Energy Objectives in the National Energy Laws.  The Council considers intends for the concepts to reflect the general objective of civil penalties, as articulated by the courts: to provide specific and general deterrence of certain harmful conduct.

Examples of conduct falling with Tier 1, Tier 2 and Tier 3 concepts

Infringement notices

The Act also provides that various infringement penalties will apply to civil penalty provisions in each Tier.

The AER may serve an Infringement Notice on a person that it has reason to believe has breached a relevant civil penalty provision in the National Energy Laws. The AER may not bring civil proceedings against a person who has chosen to pay an infringement notice for that alleged breach.

Payment of an infringement penalty is not taken to be an admission by the person of a breach of the provision.

Classification of Tiers

The COAG Energy Council has published three draft classification documents which list each current civil penalty provision in the NEL, NERL and NGL, and the proposed Tier within which it will fall.

These proposed penalty provisions impact Generators, Network Service Providers, Metering Coordinators, Metering Providers, Retailers and Network Managers. The proposed penalty provisions are also proposed to apply across jurisdictional derogations and will impact on power traders and smelter trader compliance subject to derogations. Each business operating in these areas must ensure that it understands the proposed classification and "allocation" of the specific penalty tiers, the associated liability that would arise from a breach and how these changes impact on current risk and compliance programs.

As an example, under the National Electricity Rules, clause 2.2.2(c) relates to the requirement that scheduled generators comply with any terms and conditions imposed by AEMO as part of an approval as a scheduled generating unit. Under the draft classification document, this would be classified as Tier 1 as it relates to "Supply Security and Reliability", and the "Effective operation/performance of the system and service".

As mentioned above, the relevant Energy Minister must classify each of the penalty provisions into final Tier classifications by way of Regulations (which have not yet been released).

Compulsory notice powers of the AER

Under the Act, the AER will gain the power to compel a person to appear before it to provide information, evidence or documents. This power is in addition to the existing power to require a person to provide information or documents under section 28 of the NEL, section 206 of the NERL and section 42 of the NGL.

The AER is required to publish guidelines relating to the exercise of this power, including rights and obligations, penalties for non-compliance, and purposes for which information can be obtained. Submissions are now closed for its recent draft Compulsory Notice Guidelines, and final guidelines will be published shortly.