Welcome to the latest edition of WA Resources Update, your regular newsletter about key developments for the Western Australian mining sector.
Honey, I shrunk the kids! - trends in the resources sector in 2014
By Justin Little and Stella Bae
As we roll into the second half of 2014, we reflect on the major trends in the Australian resources sector over the first half of 2014.
Going down, down, down: exploration spending in Australia
Exploration for new mineral discoveries in Australia has now reached historical lows, with recent ABS figures showing that Australian exploration expenditure has declined more than 50% (or in dollar terms, more than $500m) in the two years since March 2012. If the figures were to deduct the exploration spending that the major mining houses (such as Rio Tinto and BHP Billiton) contribute, they become even more alarming.
In Western Australia alone, mineral exploration spending is at its lowest level since the end of Q1 of 2007. What is even more concerning for the industry, is the increasing number of mining companies that have ceased exploration activities altogether.
IPO activity a bellwether for investor sentiment
Whilst Australia is on track to record its best year for IPOs in a decade, most of the recent IPO activity has been centred around the industrial, retail and financial sectors, with many of the larger IPOs coming from private equity exits.
Sadly, the resources sector has been largely ignored with only 4 of the 50 or so new floats in 2014 involving resources companies - 3 in the mining sector and 1 in the oil and gas sector. In order to gauge the current level of investor confidence in the resources sector, compare that number with the 150 floats involving resources companies in 2007!
Anecdotal evidence also suggests that there is an increasing number of attempts to convert existing listed vehicles away from the resources sector and into the technology sector through the use of backdoor listings.
Subdued M&A activity
Mining M&A transactions have been relatively flat, particularly in the public M&A space, although there has been some recent green shoots and increased asset level activity in the oil and gas sector. In the mining sector, the largest public M&A deal involving an Australian mining company in 2014 has been the recently concluded takeover of Aquila Resources by Baosteel and Aurizon, a welcome fillip for the sector and for Chinese investment more generally. BC Iron Ltd has also just announced an off-market takeover bid for Iron Ore Holdings Ltd. We have also seen an uptick in companies looking to divest non-core assets, including companies in the junior-end of the market with expensive foreign operations.
In the oil and gas sector, there continues to be some asset level activity as the major energy houses complete their capital efficiency programs. Shell have been particularly active in this space, as it seeks to reposition some of its portfolio and reduce its balance sheet exposure in several major LNG projects. In the public M&A space, the acquisition of Aurora Oil and Gas Ltd by Baytex Energy Corp for $2.4 billion has been the single largest M&A deal in the sector for some time.
Keeping a lid on costs
As commodity prices soften and profit margins decrease, mining companies have reacted by cutting capital expenditure in order to improve project economics and with it, the return for shareholders. Whilst the cost cutting mantra has been led by the global mining houses, it has well and truly spread across the industry. One only needs to look at the growing number of “For Lease” signs in Australia’s premier mining precinct of West Perth to conclude that austerity measures are being taken at all levels of the industry.
You said what? ASX’s renewed focus on disclosure obligations
The recent changes to the JORC Code (2012) and the disclosure rules in Chapter 5 of the ASX Listing Rules came into effect on 1 December 2013. The first half of 2014 has seen companies adjusting their reporting behaviours to address the new disclosure requirements.
In our experience, many companies are still struggling to fully understand the effect of these changes and there has been a recent spike in the number of requests from ASX for companies to make supplementary disclosures, with most attention being on the reporting of production targets and other forward looking statements, plus careful monitoring of distressed situations, impairments and write downs.
Commodity price volatility: the good, the bad and the ugly
In general, 2014 has seen a continuation of the weakening in commodity prices that were experienced in 2013. Lower commodity prices continue to negatively impact investor confidence.
The good: Nickel, with the price of nickel hitting its highest level in more than two years in May, almost reaching $22,000/tonne, after a ban on unrefined ore exports in Indonesia came into force in January.
The bad: Iron ore, with the price hitting a two-year low in June, falling below USD90/tonne.
The ugly: Uranium, with prices continuing to wallow around the $28/lb mark.
Abbott finally gets to ‘Axe the Tax’
Despite several unsuccessful attempts, the Federal Government has finally abolished the controversial carbon tax with effect from 1 July 2014. In addition, the Federal Government has proceeded with the repeal of the Minerals Resource Rent Tax, a tax that brought down at least two Prime Ministers, raised virtually no revenue and damaged Australia’s longstanding reputation as a country of low sovereign risk.
We expect that the removal of both taxes will lighten the regulatory and compliance burden imposed on the Australian resources industry and improve its overall international competitiveness.
Strengthening the relationship with Asian partners
In the first half of 2014, Australia signed the Australia-Korea Free Trade Agreement and the Japan-Australia Economic Partnership Agreement. Prime Minister Tony Abbott, on his recent visit to China, also indicated the Australian Government’s intention to consider changes to current FIRB approval requirements for Chinese investments by increasing the investment threshold to $1.08 billion, if the Australia-China Free Trade Agreement were to be signed, in line with the current investment thresholds under the free trade agreements with South Korea and Japan (as well as USA and NZ). These changes would remove the impact of the FIRB approval process for transactions under the relevant threshold and are intended to encourage foreign investments.
With traditional debt and equity raisings harder to secure, we have seen an increasing use of convertible notes as a funding source, particularly at the junior-end of the market. We expect that traditional debt funding will remain problematic for the remainder of 2014, but steadily improve in 2015 as market conditions improve.
More details (and more questions) on the EDI
By Claire Boyd, Cassandra Hay and Stephanie Patterson
Since announcing the proposed implementation of the Exploration Development Incentive (EDI) in 2013 the Government has been working to finalise the nature and scope of the EDI and released a paper containing the operational details for the scheme on 2 July 2014. As always, there are still questions that haven’t been answered and will await the release of the legislation.
Broadly, the aim of the EDI is to encourage investment in junior explorers undertaking “greenfields” exploration in Australia from 1 July 2014 by allowing investors to deduct the expense of mineral exploration against their taxable income. Under the scheme, a proportion of expenses will be claimable as exploration credits by investors. These exploration credits will entitle investors to a refundable tax offset.
Which explorers will be eligible to participate?
The EDI scheme aims to target junior explorers. This is to be achieved by imposing a “no income test” as well as a “no mining test”. Companies which are ‘disclosing entities’ under the Corporations Act 2001 and have no taxable income in an income year will be eligible to participate in the EDI scheme for that year. Companies that have commenced production, and companies connected or affiliated with an entity that has commenced production, will be excluded from the scheme. For tax consolidated groups, the group will be treated as a single entity with eligibility determined taking into account the activities of the group as a whole.
What expenditure is eligible?
The EDI will only apply to eligible ‘greenfields’ exploration expenditure within an Australian onshore exploration tenement.
Following the existing definition in the Income Tax Assessment Act 1997, exploration for the purposes of the EDI will include geological mapping, geophysical surveys, systematic search for areas containing minerals, except petroleum and quarry minerals, and search for minerals by drilling or other means. Expenditure on studies to evaluate the economic feasibility of mining minerals once they have been discovered will be excluded.
The ‘greenfields’ aspect is achieved by limiting exploration expenditure to expenditure incurred on activities for the purpose of determining the “existence, location, extent or quality of a new mineral resource in Australia”. It will exclude any expense related to a mineralisation classified as an Inferred Mineral Resource or higher under the JORC Code 2012, and will also exclude expenditure related to a potential or actual mine extension.
The scheme does not apply to expenditure on exploration for quarry materials, shale oil, petroleum (including coal seam gas) and geothermal energy resources.
Caps and modulation
As previously reported, the cost of the scheme will be capped at $100 million with exploration credits being capped at $25 million in 2014/15, $35 million in 2015/16 and $40 million in 2016/17.
The Government has now decided on an ex-post modulation approach. Participating companies will need to notify the Australian Tax Office (ATO) of the lesser of their exploration expenditure and their tax loss from the financial year. The ATO will then advise eligible companies of the proportion of this amount they will be entitled to provide to shareholders as exploration credits. Provided they do not exceed the amount advised by the ATO, companies will be entitled to choose the tax losses they wish to convert into exploration credits at the company tax rate. Exploration credits must be distributed by the end of the year in which modulation occurs. Further details on this modulation process will only become available when the draft legislation is released.
Which investors will be eligible to participate?
At the company’s election, exploration credits can be issued to all shareholders or only to holders of shares issued after 30 June 2014. Once this election has been made it will be irrevocable.
While electing to issue exploration credits only to holders of shares issued after 30 June 2014 may encourage the sought after investment, this election will have a number of broader consequences as it requires such shares to be traded as a separate class of shares. This will require careful consideration of the company’s constitution and Corporations Act 2001 and Listing Rule implications as well as creating complications for takeovers and schemes of arrangements and generally increasing compliance costs. In most cases, we would expect the participating companies to elect to issue exploration credits to all shareholders.
Shareholders who receive exploration credits will be entitled to refundable tax offsets equal to their exploration credits, provided they are Australian resident shareholders. These offsets will be claimed in the shareholders’ tax returns for the year they receive the credits. Similar rules that apply to franking credits will apply to exploration credits.
For those interested in the EDI, it is likely that we will gain further clarity in relation to the scheme with the release of the draft legislation and explanatory materials expected in the coming months.
Contracting for energy and resources projects: are you using the right tool for the job?
By Phil McKeiver and Stephanie Patterson
If your existing contracts (and standard form precedents) were prepared more than a couple of years ago, it may be time to review and update them to reflect recent legal developments and to ensure that they contain the necessary protections and reflect current market conditions.1
It makes good sense to standardise contracting approaches wherever possible in order to minimise the involvement of lawyers and other professionals. However, standardised contracts and standard form precedents prepared by industry associations may not be sufficient to fully protect your interests or may not be tailored to a particular activity or work location.
We have summarised below several recent legal developments and some key commercial considerations which are particularly relevant to our industry.
Work health and safety laws
If you work outside of Western Australia, you should update and strengthen your current contracts and precedents to reflect the new uniform WHS laws including, for example: the employer’s obligation to consult with workers who may be affected by a health and safety matter and to consult with others who share responsibilities for the same health and safety matter. Your contract must also address the appointment of the ‘principal contractor’ under the various State Acts.
Different health and safety regimes apply for Western Australian mine sites and for offshore activities on oil and gas projects.2 You should be aware of these regimes and ensure your contracts are consistent with the applicable requirements.
“Reasonable endeavours” and “best endeavours”
Commercial contracts commonly contain obligations on one or both parties to use “reasonable endeavours”, “best endeavours” or similar phrases. The law in Australia is still unsettled, although a recent decision by the High Court of Australia suggests that the phrases probably do have the same or a substantially similar meaning.3 To avoid doubt, you may wish to clearly articulate what types of actions will be included and excluded from your obligation to use reasonable or best endeavours (particularly if you are working offshore as these concepts may be applied differently by the courts of other countries).
It is very common for parties to attempt to exclude liability for consequential loss as they are concerned about potential liability for loss of profits and other types of damage arising from a breach of contract. However, recent legal decisions4 have highlighted that the meaning of “consequential loss” remains unsettled in Australia, so you should avoid using that term unless you clearly define what it is intended to mean or alternatively you should expressly state the specific types of losses which are intended to be excluded.
Unenforceability of payment obligations
Based on a recent decision of the High Court of Australia5 it appears that any payment under a contract could potentially be read down if it constitutes an unreasonable penalty (in the sense that the payment exceeds the actual loss or damage suffered by the other party), including termination fees, take or pay clauses, indemnities and liquidated damages. The conventional wisdom prior to this decision was that payments could only be read down for being a penalty if they related to a breach of contract and did not amount to a genuine pre-estimate of loss. Careful drafting is essential, as the High Court did indicate that clauses drafted as appropriate performance options are not likely to be void and unenforceable.
The “prevention principle” under construction law
There are a number of specific legal requirements in relation to construction contracts, so it will be in all parties’ interests to ensure that the contract contains the appropriate protections. For example, the application of the prevention principle means that the contractor cannot be penalised if it is prevented by the actions of the principal from completing the works on time. Contracts must address the principal’s unilateral power to extend time for delays it may cause to overcome the prevention principle and avoid having the time to complete the works set at large, in which case the principal may not be able to claim against the contractor.
Security of payments legislation
All Australian States and Territories have introduced security of payments legislation which establishes a process for resolving payment disputes for construction work outside of the terms of the contract. The provisions of such legislation vary from State to State and certain types of construction (e.g. for mining activities) are exempted from the legislation.6
Personal Property Securities Act 2009 (PPSA)
Depending on when they were developed, your existing contracts (and standard form precedents) may not include any provisions relating to the PPSA and this could have unintended consequences for you or other parties to the contract. The PPSA commenced on 30 January 2012 and implemented a single national law creating a uniform approach to personal property securities.7
If you did not register your security interest before the transition period expired on 31 January 2014, you may lose priority to other secured creditors or lose your interest in the secured property altogether if the other party becomes bankrupt or is placed into administration or liquidation. You should assess whether your contract creates a security interest which requires registration under the PPSA.
You will also need to carefully consider whether you wish to entirely exclude the rights and remedies contained in the PPSA or vary some of its procedural requirements (e.g. to give certain notices). You may also want to include representations and warranties that there is no security interest created under the PPSA or that, if created, such interests will be properly maintained.
As mentioned above, there are important differences in the law of each Australian State and Territory of Australia, for example in relation to occupational health and safety, construction law and employment law. So, if you are contracting in more than one State or Territory it may be necessary to modify your precedents to take account of local laws.
Obviously, if you are working offshore, your contracts will also need to take account of local laws and business conditions. For example, the laws of other countries often require the use of local labour, local materials and local currencies and they may prohibit the import of certain materials. There can also be significant differences in the types of legal and property interests which can be created under a contract in other countries. The creation and enforcement of your intellectual property rights under the contract also requires particular consideration and it is also important to carefully choose the applicable law (and dispute resolution forum) because it can be very costly and difficult to enforce judgements in relation to overseas projects.
Bribery and corruption
Many Australian resources companies work in countries and regions where bribery and corruption are commonplace. Although certain types of “facilitation payments” may be permitted by law, great care must be taken otherwise you and your company could be prosecuted under the anti-bribery and corruption laws of Australia, Great Britain and the USA, which all have “extra-territorial” effect, regardless of the country where the illegal conduct occurred.8 Your contracts should be carefully structured to ensure that any payments made to public officials comply with legislative requirements and you should ensure your arrangements with contractors and consultants prohibit the making of illegal bribes in connection with your project.
All parties hope that they will never need to call on the contract, but disagreements do arise, particularly if there has been a significant change in market conditions, as has occurred in the last couple of years. The law is also constantly evolving and there are also some important differences in laws of each State and Territory of Australia, let alone in the laws of other countries.
It is important to ensure you are using the right tool for the job: i.e. contractual terms which can be quickly and cost-effectively implemented to achieve your business objectives, while still appropriately managing legal and commercial risks, having regard to the type of activity and the place where the work is to be performed.
||Changes to existing contracts will obviously require the consent of the other party but it may be possible to negotiate amendments due to changes in law, when your contract comes up for renewal or as part of negotiating additional work packages etc.
||The Mines Safety and Inspection Act 1994 (WA) will apply in relation to mining operations in Western Australia and theOffshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) and associated regulations will apply in relation to Australian offshore petroleum activities.
||Electricity Generation Corporation v Woodside Energy Ltd  HCA 7 at .
||Particularly, the decision of the Victorian Court of Appeal in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd  VSCA 26 (26 February 2008) and subsequent decisions, for example Regional Power Corporation v Pacific Hydro Group Two Pty Ltd [No 2]  WASC 356 (26 September 2013).
||Andrews v Australia and New Zealand Banking Corporation Ltd (2012) HCA 30.
||For example, see clause 4(3) of the Construction Contracts Act 2004 (WA).
||A security interest is defined under the PPSA as ‘an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation’.
||See, for example, Division 70 of the Criminal Code, Schedule to the Criminal Code Act 1995 (Cth).
They didn’t register on the PPSR, and now they’re engaged in a $50m dispute
By Ros O'Mally, John Erbacher, Claire Boyd and Cassandra Hay
The recent news concerning the dispute between the receivers for Forge Group Limited and APR Energy over approximately $50 million worth of gas turbines has emphasised the risks for companies involved in the equipment lease business since the introduction of thePersonal Property Securities Act 2009 (Cth) (PPSA).
According to reports, APR Energy, an energy giant, leased 4 gas turbines worth approximately $50 million to Forge. Forge subsequently went into administration and its creditors appointed KordaMentha as receivers. KordaMentha are now claiming that the lease of the turbines to Forge constituted a security interest under the PPSA. Given that APR Energy failed to register this alleged security interest on the Personal Property Securities Register (PPSR), KordaMentha claims that the 4 gas turbines will have vested in Forge (that is, APR’s interest in the turbines has been extinguished and the turbines will be available to meet the claims of Forge’s creditors). At this stage, it remains unclear why APR Energy didn’t register.
Although there have already been a number of cases in Australia dealing with the consequences of failing to register a security interest, this dispute is by far the largest to come before the courts so far and is likely to have far-reaching implications, particularly for those involved in the equipment leasing industry. In this update, we discuss when security interests arise in this context and the steps that should be taken in order to protect against the potentially significant consequences of failing to register a security interest.
When do these security interests arise?
It appears the type of security interest the subject of the dispute referred to above is a ‘PPS Lease’. Unlike more ‘traditional’ security interests, PPS Leases may not ‘look’ like a security interest, but nonetheless need to be perfected to ensure that the ‘secured party’ is best protected in the event of the ‘grantor’s’ insolvency.
Because a PPS Lease constitutes a security interest for the purposes of the PPSA, a failure to register that security interest may result in the goods vesting in the grantor of the security interest, meaning that if the grantor becomes insolvent, the secured party will likely lose their goods to the grantor (or the grantor’s other creditors) despite the fact that they may have had title to those goods prior to the insolvency.
PPS Leases are leases or bailments of goods for an indefinite period or a period of more than one year (or 90 days in respect of serial numbered property).1 They don’t include leases by lessors, or bailments by bailors who aren’t regularly engaged in the business of leasing or bailing goods. PPS Leases also only apply to bailments where the bailee provides value.
PPS Leases may arise in the context of both operating and finance leases and typical examples include leases of equipment, motor vehicles, aircraft and ships. Because PPS Leases also include bailments, the types of transaction that may give rise to a PPS Lease are potentially very broad.
What’s a bailment?
Although leases are relatively easy to identify, bailments can be more difficult. In general, they arise where one person (the ‘bailor’) delivers goods to another person (the ‘bailee’) on a promise that they will be redelivered to the bailor. A simple example of a bailment is a cloakroom or valet parking arrangement.
Bailments can arise by agreement, or can be implied by surrounding circumstances. Whether a bailment will arise in particular circumstances will vary from case to case, but some of the key indicia of a bailment are:
- delivery of possession of goods by the bailor to the bailee and voluntary assumption of possession by the bailee;
- the bailee being able to control the ability of the bailor to recover possession of the goods (for example, by providing a restricted licence for entering onto land to recover goods); and
- the bailee assuming responsibility to keep the goods safe.
Examples of bailments that may constitute PPS Leases include the construction of infrastructure where it is intended that that infrastructure will be used for a finite period and then dismantled and returned (for example, in accordance with environmental rehabilitation requirements). The party on whose land the infrastructure will be built may be required to protect that infrastructure and accordingly a bailment may arise. Another example common in the mining industry is where the joint venture manager may hold certain equipment of the joint venturers as bailee for the joint venturers.
Given the likely high value of such infrastructure or other goods, parties should take steps to protect themselves by ensuring that any relevant security interests are identified and perfected.
But I’m not regularly engaged in the business of leasing/bailing goods (or am I)?
As noted above, PPS Leases don’t include leases by lessors, or bailments by bailors who aren’t regularly engaged in the business of leasing or bailing goods. Unfortunately the precise meaning of this provision has not yet been set down by Australian courts and courts in jurisdictions overseas which have a PPSA have adopted differing approaches.
So how do I best protect my business?
I’m the lessor/bailor
It is important that you have in place policies and procedures for the identification and perfection of security interests. Given the consequences of failing to register (i.e. that you may lose your asset), a conservative approach is to be preferred in all circumstances and, where unsure, you should seek advice.
Given the fact that the PPSA remains relatively new in Australia, the lessee or bailee may be unaware of the basis for such registration and may resist the registration of a security interest. Therefore it is important that you enter into a dialogue early to avoid any last-minute disputes as the timing of registration is very tight, being, in general 15 business days following the grantor obtaining possession of the goods (or, in the case of inventory, before or at the same time as the grantor obtains possession of the goods).
I’m financing the lessor/bailor
Banks and other providers of finance to parties who may be involved in leasing or bailing goods should ensure that they review the policies and procedures outlined above as part of their due diligence prior to lending as a failure to register could result in a material diminution of the borrower’s assets if the lessee/bailee becomes insolvent. Financiers should also consider appropriate representations and undertakings in their finance documents to ensure that they are best protected.
I’m buying the lessor/bailor
Purchasers of companies which may be involved in leasing or bailing goods should also ensure they review the policies and procedures outlined above and ensure the relevant sale agreement contains appropriate representations and undertakings to ensure that they are also best protected.
||Serial numbered property covered by this definition includes motor vehicles, watercraft and aircraft. As at the date of this update, legislation is currently before Parliament to remove the different time period for serial numbered property and have a flat, one year time period apply, although that legislation, being the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth) has not yet been passed by parliament.
PPS Leases also apply where the lease or bailment is for less than one year, but automatically renewable at the option of one party, or where the term is up to one year and the lessor or bailor retains uninterrupted (or substantially uninterrupted) possession of the goods with the consent of the lessor/bailor. This means that parties can’t avoid the operation of the PPSA by artificially limiting the term of the arrangement.
The ‘carbon tax’ is gone -implications for business and where to from here?
On 17 July 2014 the Australian Government repealed the legislation which created Australia’s ‘carbon pricing mechanism’ (commonly referred to as the ‘carbon tax’).
The ‘carbon tax’ took about 5 years to implement - and lasted only 2. While the Australian Government intended for there to be a direct transition from the ‘carbon tax’ to its ‘Direct Action Plan’ for carbon regulation - the timing, design and prospects of any ‘Direct Action Plan’ being implemented in Australia is uncertain.
In this article we set out the key actions for businesses to address the implications arising from the ‘carbon tax’ repeal, and consider the regime that may lie ahead for carbon regulation in Australia.
1. Liable entities must comply with ‘carbon tax’ liability for FY 2013-14
The ‘carbon tax’ repeal is effective from 1 July 2014, and no ‘carbon tax’ liabilities will be incurred from this date.
Liable businesses and other entities must, however, satisfy all ‘carbon tax’ liabilities incurred up to 30 June 2014. The final payment for FY 2013-14 ‘carbon tax’ compliance obligations is due in February 2015.
Industry assistance provided under the Jobs & Competitiveness Program and the Energy Security Fund continued in FY 2013-14 for the purpose of liable entities meeting their ‘carbon tax’ liabilities for this period. This assistance has now ceased.
The Clean Energy Regulator (and other government agencies) will retain powers to enforce the payment by liable entities of any outstanding ‘carbon tax’ liabilities.
- Liable entities should ensure that final payment of any ‘carbon tax’ liabilities for FY 2013-14 is made by February 2015.
2. Prohibition on 'price exploitation'
The Government has not introduced any transitional provisions to deal with specific commercial arrangements (including contracts) for the pass-through of savings arising from the ‘carbon tax’ repeal.2. Prohibition on 'price exploitation'
The Government has, however, introduced mechanisms to ensure that savings relating to the repeal of the ‘carbon tax’ are passed down the supply chain.
In this regard, a new prohibition on ‘carbon tax’ related price exploitation has been inserted into theCompetition and Consumer Act 2010 (CC Act). Price exploitation will occur if:
- an entity makes a ‘regulated supply’ of ‘regulated goods’ during the ‘carbon tax’ repeal transition period (FY 2014-15); and
- the entity fails to pass through ‘all of the entity’s cost savings related to the supply that are directly or indirectly attributable to the carbon tax repeal’.
At this stage, the price exploitation prohibition targets wholesale and retail suppliers of natural gas and electricity, as well as the suppliers of synthetic greenhouse gases and equipment (SGGs). This is because the only goods that expressly come within the definition of a ‘regulated good’ are electricity, natural gas and SGGs.
The Minister does have the power, however, to prescribe other goods as ‘regulated goods’. This will allow the Minister, in the event that there are significant concerns about pricing behaviour in other markets or sectors, to extend the operation of the price exploitation powers to these additional markets or sectors.
In determining whether an entity has breached the price exploitation prohibition, consideration will be given 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.
The penalties for breaching the price exploitation prohibition are material, with a maximum penalty of $1.1 million for a corporation. In addition, the entity must pay a penalty of an amount equal to 250% of the cost savings that were not passed through (plus interest).
The Australian Competition & Consumer Commission (ACCC) will have broad and strengthened powers to monitor prices of certain goods to assess the general effect of the ‘carbon tax’ scheme.
- Suppliers of electricity, natural gas and SGGs should determine the amount of cost savings that will arise from the repeal of the ‘carbon tax’ in order to comply with obligations;
- while other industry sectors (that were liable entities under the ‘carbon tax’) are not currently subject to the price exploitation prohibition, it would be prudent for these businesses to determine the cost savings that will arise and to consider whether to adjust prices, particularly if they increased prices on the basis of the ‘carbon tax’; and
- review contracts to determine how cost savings can be passed through, and ensure that the prohibition on price exploitation is complied with.
3. Prohibition on ‘false or misleading’ representations
The CC Act has also been amended to prohibit a corporation from making false or misleading representations about the effect of the ‘carbon tax’, and its repeal, on prices for the supply of goods or services during the ‘carbon tax’ repeal transition period (FY 2014-15).
This prohibition will apply across all industry sectors and, unlike the price exploitation prohibition, is not limited to the electricity and gas sector.
While there is already a provision in the CC Act which prohibits false and misleading misrepresentations, the new carbon-specific prohibition is intended to make it very clear that misrepresentations with respect to ‘carbon tax’ are prohibited.
The ACCC was very active in investigating statements made at the commencement of the ‘carbon tax’ about the quantum of price rises attributable to the scheme, and can be expected to take a similar approach in relation to the repeal. We anticipate that companies that came to the ACCC’s attention at the commencement of the ‘carbon tax’ can expect particular scrutiny.
The penalties for breaching this prohibition are material, with a maximum penalty of $1.1 million for a corporation.
- Businesses should ensure that any statements they make, including in public comments and in communications with customers, are accurate; and
- in particular, businesses should ensure that in communicating their decisions as to whether to reduce prices and, if so, by how much, any reasons they give are not misleading or deceptive.
4. Substantiating the impact of the ‘carbon tax’ repeal on price
A suite of mechanisms have been introduced which places the onus on retailers of electricity, natural gas and SGGs to substantiate the impact of the ‘carbon tax’ repeal on price. We have set out below the key mechanisms and timeframes for compliance.
(a) Carbon Tax Removal Substantiation Notice
The ACCC must issue a ‘carbon tax removal substantiation notice’ to retailers of electricity, natural gas and SGGs by 18 August 2014. The entity must comply with the notice within 21 days (or the within an extended period of not more than 28 days), by providing the ACCC with a statement (and sufficient supporting information to substantiate the statement) that explains:
- how the ‘carbon tax’ repeal has affected, or is affecting, the entity’s regulated supply input costs; and
- how reductions in the entity’s regulated supply input costs that are directly or indirectly attributable to the ‘carbon tax’ repeal are reflected in the prices charged by the entity for regulated supplies of electricity, natural gas or SGGs.
(b) Carbon Tax Removal Substantiation Statement
Retailers of electricity, natural gas and SGGs must provide the ACCC with a ‘carbon tax removal substantiation statement’ by 18 August 2014 that estimates (on an average annual percentage price basis or an average annual dollar price basis) the entity’s cost savings that are attributable to the ‘carbon tax’ repeal and that will be passed on to customers during FY 2014-15. The entity must provide sufficient supporting information to substantiate the statement.
(c) Customer Statement
Retailers of electricity or natural gas must communicate to customers a statement that identifies (on an average annual percentage price basis or an average annual dollar price basis) the estimated cost savings to each class of customers that are attributable to the ‘carbon tax’ repeal for FY 2014-15. The entity must communicate the contents of the statement to customers during the period between 18 August 2014 and 16 September 2014.
- Retailers of electricity, natural gas and SGGs should expect to receive a ‘carbon tax removal substantiation notice’ from the ACCC by 18 August 2014. Accordingly, it would be prudent for retailers to commence preparing a written response, which must be lodged with the ACCC within 21 days of receiving the notice; and
- retailers of electricity, natural gas and SGGs should commence preparing a ‘carbon tax removal substantiation statement’, which must be lodged with the ACCC on or before by 18 August 2014 and be made publicly available on the entity’s website until 30 June 2015; and
- retailers of electricity and natural gas should commence preparation of a statement to customers, which must be distributed between 18 August 2014 and 16 September 2014.
5. What is next for carbon regulation in Australia?
The Commonwealth Government has maintained its commitment to implementing its 'Direct Action Plan' to reduce Australia’s emissions by 5% below 2000 levels by 2020.
The central component of the 'Direct Action Plan' is an Emissions Reduction Fund (ERF). The ERF will be a fund of $2.55 billion from which the Government intends to purchase carbon credits generated by certified emission reduction projects. For more information on the key elements and opportunities for business arising from the ERF.
On 18 June 2014 the Government introduced the Carbon Farming Initiative Amendment Bill 2014 (CFI Amendment Bill) to implement the ERF. The CFI Amendment Bill was referred to the Senate Legislation Committee for inquiry and report by 7 July 2014. While the Committee supported the CFI Amendment Bill as a key component of the Government’s response to climate change, there was and remains no bipartisan support for this approach to carbon regulation in Australia. Parliament is not expected to consider the CFI Amendment Bill until late August 2014. The Government will not be able to pass the legislation through the Senate to create the ERF without the support of Palmer United Party Senators. At this stage the Palmer United Party has indicated that any support for the ERF is conditional on the Coalition Government’s support for a form of emissions trading scheme proposal, which to date appears unlikely to be given by the Government.
A ‘safeguard mechanism’ is proposed to be implemented by 1 July 2015 to set absolute emissions baselines for large scale facilities that emit direct emissions of at least 100,000 tonnes of CO2-e a year (estimated to be around 130 companies). While the Government intends to implement a flexible framework to enforce compliance with the emissions baseline, there is scope for deal-making arising from the implementation of the ERF could result in the ‘safeguard mechanism’ adopting some emissions trading scheme mechanisms (such as a baseline and credit trading scheme).
The effect of the above is that greenhouse gas emitting sectors will enter a ‘carbon void’ for an unspecified period of time in which there is no national regulatory scheme in place.
Businesses should consider how best to use funds freed up by the ‘carbon tax’ repeal, to position themselves to compete in a ‘carbon constrained’ Australian environment in the long term. In our view, a commitment to best practice sustainability will remain integral to streamline approval pathways for greenhouse gas emitting projects – regardless of the current political landscape surrounding carbon regulation in Australia.