The enforcer

A key role of the Australian Energy Regulator (AER) is the monitoring and enforcement of the national energy rules. When energy businesses fail to comply with the rules the AER can fine them or take them to court to seek a bigger penalty. The AER has just published a summary of its enforcement activity for the financial year just ended. There are some eye-watering fines there: Energy Australia top the list with $1.5m for disconnecting eight hardship customers, closely followed by AGL with $1.3m for failing to keep up with their reporting of retail statistics to the AER. On the generation side, three wind farm owners paid a total of $2.65m for failure to notify AEMO of their ride-through settings. These ride-through settings made them trip off unexpectedly due to frequency fluctuations after storms destroyed South Australian transmission lines in 2016. This in turn contributed to the cascading failures that resulted in the black system event. Action is ongoing against AGL for their South Australian wind farms in respect of the same event.

All of these major punishments followed court action by the AER against the relevant companies. But AER can also levy penalties based on infringement notices for less serious infractions, and in the case of systemic issues can levy multiple notices on the same business. Infringement notices netted almost $1m in fines in total, across seven companies (including AGL twice more). This included generators, retailers and gas shippers.

If these seem like large numbers, they are only going to get better. After almost a decade, Australian governments have signed off on an enhanced penalties regime. Infringement notices, which were capped at $20,000 per notice, have risen to $67,800 per notice. This is for tier 1 and tier 2 infringements, which make up 90 per cent of possible ways that companies can break the rules.

Court action can now result in much bigger fines, with tier 1 breaches of the rules – which covers issues relating to consumer harm (public safety, financial loss), adverse market impacts, supply security and reliability and unacceptable market participant behaviour – maxing out at the greater of: $10m, 10% of turnover or 3 x benefit from breach. For large retailers, given margins are around 5%, a fine could wipe out two years’ profits. For small retailers, $10m could be bankrupting.

The AER expects that the enhanced penalties will lead to greater levels of compliance with the rules. Supply chain participants are wary, considering that the new framework not only has higher penalties, but also rigidly assigns many breaches to the top tier regardless of whether their impact is proportionate to the penalty.

Notably, none of the businesses who were financially penalised in 2020-21 were networks. This may reflect cultural differences between different parts of the supply chain, or it may reflect that price-regulated businesses can afford to spend more on compliance and recover it from customers compared to competitive businesses. Networks have previously been penalised in the past, and the AER did note some beaches of the ringfencing guideline, although these apparently did not warrant financial penalty.

It also may be partly related to the activities that resulted in fines being correlated to the AER’s enforcement priorities for the year past. IF this is the case, then the new enforcement priorities may provide a guide to what businesses get in trouble for in 2021-22:

  • Effective identification of consumers in financial difficulty and offer of payment plans that have regard to the consumer’s capacity to pay
  • Ensure exempt seller compliance with exemption conditions, including consumer access to ombudsman schemes
  • Focusing on registered generators’ compliance with AEMO dispatch instructions and their ability to comply with their latest offers at all times
  • Ensure service providers meet information disclosure obligations and other part 23 National Gas Rules obligations
  • Ensure timely and accurate gas auction reporting by registered participants

Businesses affected by any of these priorities will be watching nervously to see how the AER interprets then new penalty rules. Meanwhile, consumers will largely be cheering the AER on.