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Australia – The Government & PUP Finally Wave Good-Bye To The Carbon Tax.

22 July, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

What You Need To Know

 

  • On 17 July 2014, the Clean Energy Legislation (Carbon Tax Repeal) Bill 2014 passed the Senate (in the same form as passed by the House of Representatives on 14 July 2014). This Bill contains the key legislative provisions repealing the carbon tax. 
  • The Bill includes the amendments negotiated by the Palmer United Party which principally change the test for whether an entity is engaging in price exploitation in relation to the carbon tax repeal. Prior to these amendments, price exploitation would occur if prices remained “unreasonably high” – now, however, price exploitation will occur if an entity making a regulated supply fails to pass through “all of the entity’s cost savings relating to the supply that are directly or indirectly attributable to the carbon tax repeal” (called the carbon tax price reduction obligation).
  • The price exploitation provisions will apply to all entities supplying electricity, natural gas or synthetic greenhouse gas, but electricity derivative contracts are unlikely to be caught.
  • Failure to pass on cost savings associated with the carbon tax repeal could attract penalties equal to 250% of the costs savings not passed through (plus interest) and financial penalties of up to AUD 1.1m per contravention. 
  • The Bill also requires electricity and gas retailers, and importers/sellers of synthetic greenhouse gas, to:
    • provide statements to the ACCC identifying the estimated cost savings for the year beginning 1 July 2014 to be passed on to their customers (electricity and gas retailers must also provide a similar statement to their customers); and
    • provide information and documents to the ACCC explaining their compliance with the carbon tax price reduction obligation.

 
What You Need To Do

 

  • Suppliers of electricity, gas or synthetic greenhouse gas should start preparing for the changes as set out in this Bill as it is likely that Royal Assent will be received in the immediate future.
  • Relevant contracts should be reviewed to assess how carbon cost pass through can be unwound, and other commercial arrangements assessed to determine whether they could amount to carbon price exploitation.
  • Electricity and gas retailers, and importers/sellers of synthetic greenhouse gas, should start considering the content of statements required to be provided to the ACCC and the information and documents required to substantiate those statements.

 
The Clean Energy Legislation (Carbon Tax Repeal) Bill 2014 (Bill) has passed the Senate following the 2013 bill of the same name being rejected by the Senate on 10 July 2014. The amendments introduced by the Government following negotiations with the Palmer United Party (PUP) are directed at the PUP’s position that all savings from the repeal of the carbon price should flow back to consumers.

 
This Greenhouse Update focuses on the additional provisions introduced by the Government (as negotiated with the PUP) and passed by the Senate. 

 

Passing On All Cost Savings

 
The Bill inserts a new Part V (now headed “Carbon Tax Price Reduction Obligation”) into the Competition and Consumer Act 2010 (Cth). Unlike the bill originally proposed by the Government and read into the Senate on 2 December 2013 (Original Bill), the Bill now expressly states that:

 

The intention of the Parliament in enacting this Part is to ensure that all cost savings attributable to the carbon tax repeal are passed on to consumers of regulated goods through lower prices.

 
The Original Bill contained a prohibition on “price exploitation” in relation to the carbon tax repeal. A corporation was said to engage in price exploitation if it made a “regulated supply”, and the price for that supply was “unreasonably high”, either having regard to the carbon tax repeal alone, or if the supplier’s costs, supply conditions and other relevant matters were taken into account.

 
The Bill still includes a prohibition on price exploitation, but now provides that “an entity” (which is defined more broadly than a “corporation” to include individuals, partnerships, body corporates etc) will engage in price exploitation in relation to the carbon tax repeal if:

 

  • it makes a regulated supply; and
  • the price for the supply “does not pass through all of the entity’s cost savings relating to the supply that are directly or indirectly attributable to the carbon tax repeal” [emphasis added].

 
A “regulated supply” remains any supply of electricity, gas or synthetic greenhouse gas.

 
An equivalent change has been made to the provision of the Bill that gives the ACCC the power to issue a written notice to a corporation stating that the ACCC considers the corporation has engaged in price exploitation in relation to the carbon tax repeal.

 
In determining whether the price for a supply made by an entity does not pass through all of the entity’s cost savings relating to the supply that are directly or indirectly attributable to the carbon tax repeal, regard must be had to the following matters:

 

  • the entity’s cost savings that are directly or indirectly attributable to the carbon tax repeal; 
  • how the cost savings can reasonably be attributed to the different supplies that the entity makes; 
  • the entity’s costs; and
  • any other relevant matter that may reasonably influence the price.

 
Penalties

 
Companies that breach the price exploitation prohibition may face substantial financial penalties of up to AUD 1.1m per contravention.

 
In addition, the Bill now provides that an entity that breaches the prohibition by failing to pass through all of its relevant cost savings in respect of a particular supply of electricity or gas must pay a penalty of an amount equal to 250% of the cost savings that were not passed through (plus interest). Any such penalty amount is due and payable on 1 July 2015, and may be enforced by the ACCC by bringing Court proceedings on behalf of the Government to recover the money as a debt owed by the relevant entity.

 
The ACCC must report to Parliament within 13 months of Royal Assent in respect of penalties payable by entities under Part V.

 
Compliance Issues

 
An obvious difficulty with the new price exploitation provision is the question of how “all cost savings” are to be calculated, particularly where cost savings may be relevant to more than one regulated good supplied by a particular supplier. The matters specified in the Bill do not provide useful guidance as to how this is to be determined.

 
Suppliers faced with this strict obligation to pass through all cost savings will need to carefully consider their approach to interpreting and complying with the new price exploitation provisions. This new statutory obligation applies notwithstanding contractual obligations (ie even where parties have agreed to a “carbon inclusive” price, the obligation would seem to apply).

 
ACCC Obligation To Request Information

 
The Bill also provides that the ACCC must, within 30 days of the Bill receiving Royal Assent, issue a “carbon tax removal substantiation notice” to all:

 

  • electricity retailers that sell electricity to customers; 
  • natural gas retailers that sell natural gas to customers; and
  • bulk SGG importers that sell synthetic greenhouse gas to SGG customers (together, the Relevant Entities).

 

Each of the Relevant Entities will be required to provide the ACCC, within 21 days, with:

 

  • a written statement that explains how the carbon tax repeal has affected the entity’s regulated supply input costs, and how any reductions to those input costs that are attributable to the carbon tax repeal are reflected in prices charged to consumers for regulated supplies of electricity, natural gas or synthetic greenhouse gas; and
  • information and/or documents that substantiate the explanation contained in the written statement.

 
The 21-day period for compliance can be extended by the ACCC (by a maximum of 28 days). Failure to comply with a carbon tax removal substantiation notice will be a strict liability offence that carries a maximum penalty of AUD 34,000.

 
Statement Of Cost Savings To ACCC

 
Within 30 days of Royal Assent of the Bill, each of the Relevant Entities must also provide the ACCC with a statement that:

 

  • estimates the cost savings (on an average annual percentage price basis or an average annual dollar price basis) that are attributable to the carbon tax repeal (with corresponding evidence to substantiate the statement); and
  • states how those savings will be passed on to each class of electricity, natural gas or SGG customers during the financial year that began on 1 July 2014.

 
Copies of those statements must be made available on the Relevant Entities’ websites until the end of June 2015.

 
Failure to comply with the above requirements will be a strict liability offence that carries a maximum penalty of AUD 85k per contravention.

 
Statement Of Cost Savings To Customers

 
Electricity retailers and natural gas retailers (but not SGG retailers) must prepare equivalent statements that:

 

  • estimate the cost savings (on an average annual percentage price basis or an average annual dollar price basis) that are attributable to the carbon tax repeal (with corresponding evidence to substantiate the statement); and
  • state how those savings will be passed on to each class of electricity and natural gas customers during the financial year that began on 1 July 2014.

 
Failure to comply with the above requirements will be a strict liability offence that carries a maximum penalty of AUD 85k per contravention.

 
The electricity and gas retailers must then ensure that the above information is communicated to each customer in the relevant class between 30 days and 60 days after Royal Assent. Failure to comply will be a strict liability offence that carries a maximum penalty of AUD 68k.

 
Further contraventions of the Competition & Consumer Act 2010 (Cth) may arise if the information contained in the statements is false or misleading in some respect.

 
These new obligations are likely to impose a substantial burden on the companies to which they apply. In addition to the extremely tight timeframes for compliance, and the strict liability nature of the provisions, it is, as a general matter, difficult to envisage how companies will be able to meaningfully estimate the cost savings attributable to the carbon tax repeal. Particular attention will need to be paid to any information and documents gathered for the purpose of complying with the substantiation notices described above.

 
Electricity Derivative Contracts – Regulated Supply?

 
The amendments do not seek to change the definitions of “regulated goods” or “regulated supply” in the Original Bill.  Electricity derivative contracts and electricity futures contracts which are typically used by wholesale participants in the National Electricity Market, are unlikely to be a regulated supply. This will be relevant to suppliers in determining whether “all cost savings attributable to the carbon tax repeal have been passed on to consumers”.

 
Next Steps

 
Suppliers of electricity, gas or synthetic greenhouse gas should assess how to pass through “all of the entity’s cost savings relating to the supply that are directly or indirectly attributable to the carbon tax repeal”. Relevant contracts should be reviewed to assess how carbon cost pass through can be unwound, and other commercial arrangements assessed to determine whether they could amount to carbon price exploitation.

 

Industry participants should ensure they track when this Bill will receive Royal Assent. This is particularly relevant for entities required to provide statements to the ACCC and customers (estimating cost savings flowing from the carbon tax repeal) following Royal Assent of the Bill. Given the very short timeframes within which such statements must be provided, suppliers will need to move quickly to prepare appropriate documentation, and to consider their approach to dealing with the ACCC in relation to these issues.

 

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For further information, please contact:

 

Tony Hill, Partner, Ashurst
tony.hill@ashurst.com 

Jeff Lynn, Partner, Ashurst
jeff.lynn@ashurst.com

 

Paul Newman, Partner, Ashurst 
paul.newman@ashurst.com 

John Briggs, Partner, Ashurst
john.briggs@ashurst.com

 

James Bruining, Partner, Ashurst 
james.bruining@ashurst.com

 

Natsuko Ogawa, Partner, Ashurst 
natsuko.ogawa@ashurst.com

 

Peter Limbers, Partner, Ashurst 
peter.limbers@ashurst.com

 

Ashurst Environment Practice Profile in Australia 

             

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