Reform of the AER civil penalty regime

3 minute read 27.07.2020 Clay Wohling, Lisa Papanicolaou, Emily Johnson, Lachlan McNamara

How will the proposed reforms in the Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Bill 2020 impact the energy sector in South Australia? As the bill awaits its passage through the South Australian Parliament, we analyse its implications.

The Statutes Amendment (National Energy Laws) (Penalties and Enforcement) Bill 2020 (Bill) was agreed by the COAG Energy Ministers on 20 March 2020 and is currently awaiting passage through the South Australian Parliament.

The Bill proposes to amend the National Electricity Law, National Gas Law and National Energy Retail Laws (National Energy Laws) to provide for a more 'flexible and sophisticated' penalty regime. This increases the maximum penalties and provides for their periodic indexation, and strengthens and expands the legal tools available to the Australian Energy Regulator to carry out its role. This will bring the National Energy Laws more in line with other regulatory regimes such as the Australian Consumer Law.

The reforms primarily focus on introducing a three-tiered penalty regime, with the overall aim of promoting public interest by implementing penalties consistent with the behaviour they cover. The reforms will see the maximum penalties increased, and allow for periodic indexation of the penalties. This will provide the AER with greater flexibility and an array of additional legal tools to assist with the discharge of its regulatory functions.

Tier structure

The Bill proposes to introduce three tiers.

Tier 1 is for more severe breaches that could result in:

consumer harm type 1 which is primarily concerned with severe types of harm (i.e. a risk to public safety, death or serious injury to a person, reduction of consumers' fundamental right to access essential electricity and gas services, financial harm or economic loss for consumers, or a failure to deal with hardship (or other vulnerable) customers appropriately);
an adverse market impact;
issues of supply security and reliability; or
unacceptable market participant behaviour.

Tier 1 carries a maximum penalty of $500,000 for natural persons, and for bodies corporate, an amount not exceeding the greater of $10 million, three times the value of any benefit reasonably attributable to the breach, and (if that value cannot be determined) 10% of the body corporate's annual turnover.

Tier 2 covers breaches that may result in:

consumer harm type 2 (i.e. less severe than type 1 consumer harm);
issues with market administration; or
inappropriate market participant behaviour.

Tier 2 carries a maximum penalty of $287,000 (and $14,400 for every day the breach continues) for natural persons, and approximately $1.45 million (and $71,800 for every day the breach continues) for bodies corporate.

Tier 3 covers all remaining civil penalty provisions which do not fall within either Tier 1 or Tier 2. Tier 3 carries a maximum penalty of $33,900 (and $3,390 for every day the breach continues) for natural persons and $170,000 (and $17,000 for every day the breach continues) for bodies corporate.

Under the National Energy Laws, the AER may also issue an infringement notice if it believes a person or body corporate has breached a relevant civil penalty provision. The Bill proposes to amend the National Energy Laws so that the amount of an infringement penalty depends upon the classification of the relevant civil penalty provision as a Tier 1, 2 or 3 provision.

Decision matrix

A decision matrix has been prepared by the COAG Energy Council to assist the AER in determining penalties under each respective piece of legislation. The matrix poses questions relating to regulatory concepts, which the AER will use in assessing any breaches. The decision matrix also creates a 'flow down' assessment process, whereby the AER will respond to Tier 1 questions in assessing a contravention, before then moving down to Tier 2 and Tier 3 if required.

A proposed tier and matrix category has been created for each civil penalty provision in the National Energy Laws and the accompanying rules. The majority of provisions are within Tiers 1 and 2, the more severe breaches.