Yesterday the Morrison Government introduced major legislation to reduce energy prices. Known as the “Big Stick”, the Treasury Laws Amendment (Prohibiting Energy Market Misconduct) Bill will penalise misconduct by energy companies and boost competition.
For too long, electricity retailers have in the words of the ACCC “played a major role in poor outcomes for consumers”. This legislation enables consumers to hit back, holding companies to account in three areas.
First, retail pricing. Where there is a “sustained and substantial” reduction in costs, retailers would be required to pass them on.
Capitalising on complex offer structures and confusing discount strategies, the ACCC found the retail margins have more than doubled between 2007-08 and 2017-18.
Going forward, the ACCC will be able to generate more information from retailers about their costs and penalise them when they don’t pass on wholesale price reductions.
Second, the contract market. Large energy retailers tend to enter into hedge contracts with generators who guarantee supply at a certain price.
This enables retailers to manage price volatility risks as they will have guaranteed supply that they then can provide to their customers.
But sometimes generators may abuse their position by holding back contracts so that the costs faced by a competitor go up. This sort of anticompetitive behaviour is not on and falls foul of this legislation.
Third, wholesale markets. Power companies sell into what is called the ‘spot market’, where retailers bid for a certain amount of power at a certain price in five-minute intervals.
But again, as identified by the ACCC, some companies may hold back supply by taking their plants offline for discretionary maintenance at times of high demand which has the effect of forcing prices up.
Where there is misconduct in each of these three areas there is a range of penalties provided in the legislation.
The ultimate sanction, applying only to aggravated misconduct in the wholesale market, is a divestiture order. This is where a company is forced to sell an asset to a third party.
It is a penalty of last resort. It can only occur when the ACCC makes a recommendation to the Treasurer, the Treasurer applies to the Federal Court and the Court subsequently determines that not only a breach has occurred, but the divestiture is proportionate and targeted.
The Morrison Government is unequivocally focused on delivering lower energy prices. We have put in place a gas security mechanism to ensure domestic gas is available in the event of east coast shortfalls.
We are investing in new generation and storage with Snowy 2.0 and other projects to help industry We have introduced a default market offer that provides more transparency and prevents companies gaming the system.
The new default rate will see median standing offer households in NSW save up to $181 on energy bills.
The “Big Stick” legislation is another piece in the energy puzzle.
The legislation will sunset on 1 January 2026, with a review in 2024 to ensure these new powers and penalties are working as intended.
Josh Frydenberg is the Federal Treasurer