Penalties for breach of National Energy Laws set to increase under proposed three-tier framework: consultation now open

There is now more clarity to the new three-tier penalty regime in the Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Bill 2020, which is currently awaiting passage by the South Australian Parliament, with the COAG Energy Council's publication on 13 July 2020 of a draft Classification of Tiers, Decision Matrix and Concept Table.

The draft Decision Matrix and Concept Table provide a framework for the classification of current and future penalty provisions in the National Energy Laws – the National Electricity Law, National Gas Law and National Energy Retail Law – as Tier 1, Tier 2 or Tier 3 penalties by the relevant Minister. 

Once the Bill is enacted, market participants should be prepared and on notice for increased enforcement action by the Australian Energy Regulator (AER).  Not only will there be increased maximum penalties, but the AER will have more legal tools available to perform its role.  

The call for higher penalties

The publication of the draft Classification of Tiers, Decision Matrix and Concept Table marks the next step in reforms to the National Energy Laws which give effect to the recommendations of the ACCC'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 proposed changes detailed in the draft Bill 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 Council has described the proposed penalty regime as "more flexible and sophisticated [and] akin to that of the Australian Consumer Law". The 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 draft legislation 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 will be addressed by the Bill, if enacted in its current form. The Bill 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 Bill 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 Council has published three draft classification documents which list each current civil penalty provisions in the National Electricity Law, National Energy Retail Law and National Gas Law, and the proposed tier it will fall within.

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".   

Following consultation, regulations will be drafted to give effect to the final classifications.  

Next steps: making submissions, getting compliance in order

Consultation on the draft Classification of Tiers, Decision Matrix and Concept Table will close on 10 August 2020.  The Council has posed six specific questions for feedback, including agreement/disagreement with any proposed classifications of particular civil penalty provisions. Submissions can be made via email to [email protected].

The significant increase in penalties for breach of the National Energy Laws that will come into effect once the Bill is enacted reinforces the need for companies to take action now to ensure that comprehensive and up-to-date compliance programs are in place.