The new Coalition Government has taken its first step towards a repeal of the Carbon Pricing Mechanism (CPM) (or the so-called "carbon tax")1 by releasing exposure drafts of its CPM repeal bills and an accompanying consultation paper. One central goal of the Government in repealing the CPM is that cost savings will be reflected in lower prices and flow through to benefit ultimate consumers.
Instead of allowing the economy to respond on its own accord to cost influences, the exposure draft seeks to orchestrate greater pass through to consumers of cost savings encountered by reason of the CPM repeal.
Modelled upon the regime introduced to prevent price exploitation upon the introduction of the GST, Schedule 2 to the main CPM repeal bill,2sets out a range of proposed amendments to the Competition and Consumer Act 2010 (Cth) (the CCA).
These amendments seek to prevent "price exploitation" by effectively compelling a reasonable pass through of cost savings experienced by a gas or electricity supplier as a result of the repeal of the CPM. The amendments will also endow the Australian Competition and Consumer Commission (ACCC) with additional monitoring and enforcement powers in relation to CPM repeal pricing methodology, pricing behaviour and associated representations made in trade or commerce.
The ACCC is to be given an additional $10 million of funding over 3 years to facilitate the performance of these additional functions.
Price exploitation by suppliers of gas and electricity
A prohibition against "price exploitation" in relation to the repeal of the CPM is the most significant proposed intervention. If the bill is passed in its current form, certain businesses will be prohibited from supplying certain goods at an "unreasonably high" price between 1 July 2014 and 30 June 2015.
Understandably, it may be difficult for a business to "unwind" its pricing, especially where: costs of the CPM tax repeal are incurred by it indirectly; costs are only one of numerous cost variables; and cost impacts experienced by it do not have a direct or "pass through" correlation with the prices it charges.
- the prohibition against price exploitation is currently confined to suppliers of electricity, natural gas, synthetic greenhouse gas, and synthetic greenhouse gas equipment (regulated goods), thereby focussing upon those businesses that will experience the most significant and direct impacts of the CPM repeal;3
- whether or not a price is "unreasonably high" will be determined by reference to the cost impact of the CPM repeal but will also take into account the supplier's costs, market conditions and any other relevant matters (we discuss what this means in more detail below).
If businesses seek to increase their margins by not passing on a cost savings they receive as a result of the CPM repeal, their prices may be considered to be "unreasonably high". Ordinarily, a decreased tax burden would result (either directly or indirectly) in cost savings to a business which, if not passed onto customers in the form of lower prices, would increase the profit margins of that business.
However, if those cost savings do not eventuate, or are offset by other increases to the cost of inputs, there may be no need to reduce prices (and perhaps even an argument in favour of increasing them). Of course, this must be assessed on a case by case basis.
That said, absent a particularly disadvantageous forward contract, it can be expected that most suppliers of "regulated goods" will experience some direct cost saving that they would be required to pass on to all of their customers. For example, many electricity retailers will have already contracted or hedged for the wholesale price of electricity (which currently includes a carbon component) for the 2014 financial year. To some extent, therefore, they may not encounter the full impact of the CPM repeal on its costs until those arrangements end.
The requirement to reduce prices under the proposed bill will trump any contractual mechanism that does not otherwise permit price changes. Although this type of regime may be desirable for the protection of small customers on standard form supply contracts, difficulty could arise where the risk of a carbon tax repeal was built into the pricing (and other terms) agreed between the parties at the time of contracting.
This is particularly relevant for large customer supply contracts. In those circumstances, the customer might argue that they are entitled to a certain reduction in price attributable to the CPM repeal, when, in fact, that reduction had already been "priced in".
In short, the mathematics and accounting associated with adhering to the price exploitation regime will not be straightforward. It may be difficult to strike the right balance between the need to unbundle charging sufficiently so that the component of the charge attributable to the CPM can be removed, without leading to a burdensome level of administration and analysis on a customer-by-customer basis to justify that charge, not to mention interference with private commercial imperatives.
The approach of the ACCC to price exploitation
The ACCC has indicated that it will take a "reasonable and proportionate approach" in assessing what price is "unreasonably high" but has also indicated it expects that energy prices will go down fairly immediately upon the CPM repeal. Therefore the message is that provided that businesses supplying regulated goods take a measured approach to passing through cost improvements associated with the CPM, they are unlikely to attract the ACCC's gaze. However, whatever approach is adopted for pricing out the CPM, it should be based upon a reliable methodology that is supported by the accounting and reasonable in all of the circumstances.
If the ACCC considers that a business has engaged in price exploitation, the ACCC will be able to issue a notice to that business alerting them to its concern. Presumably, it is intended that upon receipt of such a notice, the recipient will take action by investigating its pricing and, if an issue is identified, take action to remedy it.
The issuing of such a notice by the ACCC will constitute prima facie evidence of the alleged wrongdoing in the event that proceedings are brought against the business. The ACCC is likely to issue a notice before it commences proceedings (if it does so at all). However, either way, it may seek a pecuniary penalty of up to $1.7 million (for a body corporate) or $340,000 (for individuals) and other orders for price exploitation by a supplier of regulated goods.
Consistent with its enforcement toolkit for many existing consumer protections, the ACCC will also receive the power to issue infringement notices if it has "reasonable grounds" to believe that there has been an instance of price exploitation. Recipients will either need to pay a specified penalty4 or face the prospect of the ACCC taking further action, including court action. Paying the specified penalty under an infringement notice will protect a business from further action by the ACCC.
The ACCC will also be able to notify businesses of the maximum price that it considers may be charged for particular regulated goods without contravening the prohibition against price exploitation. The ACCC may apply for a court order to enforce that maximum by preventing a business from supplying regulated goods above a specified price and/or requiring a business to refund money to any customers that purchased regulated goods.
We would envisage that the ACCC would be very cautious to set a ceiling price for a particular supply without exhausting other avenues and/or conducting an in-depth study into a supplier's pricing imperatives. It could, otherwise, have the unintended consequences of distorting the market and stifling new entry.
False or misleading CPM repeal representations
Due to the price exploitation provisions, a consumer that has a direct relationship with a supplier of energy (namely an energy retailer) can be expected to receive a price reduction upon repeal of the CPM. All other suppliers, however, are under no legal obligation to pass through cost savings experienced by it. It is therefore possible that the buck may stop with businesses.
The Federal Government is also proposing to prohibit false or misleading representations made by a business in relation to the effect of the CPM or its repeal on prices. This should not, however, represent an increased regulatory burden for any business. There are already prohibitions under the Australian Consumer Law5 against making false or misleading representations with respect to the price of goods or services.
Nevertheless the proposed prohibition is a helpful reminder to businesses that they cannot misstate the effect of the CPM or its repeal on its prices and substantial penalties may lie against a contravenor.6 However, the new law would not actually dictate the pass-through of costs savings associated with the CPM repeal.
The ACCC's price monitoring and information gathering powers
If the CPM repeal bill is passed in its current form the ACCC will be empowered to monitor the prices of goods and services. This power is given to the ACCC in relation to goods and services supplied by "liable entities" under the CPM, not just in relation to regulated goods. This monitoring role may also be performed to aid the ACCC to assess the general effect of the CPM repeal on those prices.
Related to this will be the ACCC's new ability to issue notices requiring the production of information or documents that (a) relate to prices or the setting of prices; and (b) will or may be useful to the ACCC in fulfilling its new price monitoring function. Unlike the ACCC's usual section 155 information-gathering powers, the power to issue a notice is not required to be triggered by a suspected contravention of the law. Accordingly this is a powerful regulatory tool.
Third party actions
Any person who suffers loss or damage as a result of a contravention of the proposed prohibitions against price exploitation or false or misleading CPM repeal representations will be able to bring an action to recover the amount of their loss or damage. For example, a customer of a supplier of regulated goods could seek a refund of amounts paid by it on the basis of price exploitation.
For those entities that may be caught by the price exploitation prohibition, the development of a logical and justifiable post-CPM pricing methodology will be essential. Records should be kept of the development of this methodology to assist the ACCC with any inquiry that might arise.
Any price published in the past, now or in the future will form part of the relevant context to any consideration of the reasonableness of prices following the repeal of the CPM and any price advertised or otherwise offered for the year following the repeal of the CPM cannot misstate the impact of the CPM or its repeal.
All liable entities should assume that their pricing behaviour will be monitored by the ACCC, especially if the ACCC expressed interest in its pricing methodology upon the introduction of the CPM.
The exposure draft of the repeal legislation is, as the title suggests, a draft only. Changes to the legislation are anticipated. Nonetheless, it is apparent that some mechanism will be likely to be legislated to help improve the extent to which CPM repeal savings encountered by businesses are passed through to consumers.
Many thanks to Joshua Buckland for his assistance in preparing this article.
1 Under the Clean Energy Act 2011 (Cth) and associated instruments.
2 the Clean Energy Legislation (Carbon Tax Repeal) Bill 2013 (Cth).
3 The list of "regulated goods" can be increased by subordinate legislation.
4 $102,200 for listed corporations, $10,200 for other body corporates and $2,040 for individuals.
5 which forms Schedule 2 to the CCA.
6 A breach of the prohibition against false or misleading CPM repeal representations may result in the imposition of a pecuniary penalty of up to $1,105,000 (for a body corporate) and $221,000 (for and individual). The infringement notice regime described above also applies to this contravention.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.