2 August 2011

Raif Sarcich
Principal Policy Officer
Energy Sector Development Division
Department of Primary Industries
GPO Box 4440
Melbourne VIC 3001

By email: raif.sarcich@dpi.vic.gov.au

Dear Raif,

RE: DISCUSSION PAPER – VICTORIA-SPECIFIC REGULATORY REQUIREMENTS UNDER THE NATIONAL ENERGY CUSTOMER FRAMEWORK

Thank you for the opportunity to provide input to the Department of Primary Industry's Discussion Paper - Victoria-Specific Regulatory Requirements under the National Energy Customer Framework.

Origin supports DPI's proposed approach to consolidate Victoria-specific regulation to the extent feasible, and notes that the Victoria-specific regulation will be collectively referred to as the "Victorian Energy Regulatory Rules" (VERR). We have used the same terminology, noting that the VERR will not necessarily be one instrument.

Overall, we support the proposals to allow the National Energy Customer Framework (NECF) to take precedence over many of the current Victorian rules. As we have stated previously, we strongly support the NECF and the efficiency benefits that it will deliver through nationally consistent energy law and regulation.

Given this, we will not comment on each aspect of the DPI discussion paper but instead concentrate on some of the exceptions from the NECF as now proposed for the VERR.

Before addressing the detailed provisions, however, it is worth focussing on some of the decision-making premises of DPI as outlined in the discussion paper. Our main concern is with the DPI view that: "As a matter of principle it would be unacceptable for Victorian consumers to be materially disadvantaged by the move to the national framework" and the subsequent statement that "Victoria-specific legislation and/or regulation is required where it has been demonstrated that Victorian customers will be materially disadvantaged in the national framework".

The above statements may seem reasonable on first sight, but three problems then emerge.

First, the NECF has been agreed to by the jurisdictions, and by this we must infer that the jurisdictions – including Victoria - support the content of the NECF, including those provisions that reflect a difference from local preferences. If jurisdictions choose to then keep their own regimes wherever there is the potential for someone in their state to be 'worse off' relative to the status quo, the NECF will be fundamentally undermined.

Unfortunately we are starting to see this phenomenon, with two states already flagging that they will keep their customer definitions to match their regulated pricing regimes, and all states keeping various idiosyncratic state differences that are seen to be politically important. Victoria has historically been the state with the most regulation (and the most 'iconic' legislation), so it is understandable that the greatest work to accept NECF would be in this state. However, it is nonetheless disappointing that the 'no worse off' criterion then leaves the state idiosyncrasies largely intact and thus undermines the NECF that we have worked so hard to implement as a policy community since 2004.

Part-implementation or 'carving out' NECF provisions by keeping the jurisdictional status quo is not a costless decision. The costs of complying with changing rules and part-implementation across the jurisdictions run the risk of wiping out the benefits of national reform. It must be remembered that further complication is unlikely to benefit customers, and costs of managing complexity are also ultimately paid by customers.

This situation is then made worse by a second point, which is that much of the iconic Victorian legislative approach came into existence because of the politics of a particular period than because of rationally decided policy. For example, the wrongful disconnection payment policy was legislated in 2004 at a time when statements were being made by some parties that retailers were widely in non-compliance with disconnection processes, despite the ESC's findings to the contrary. (The ban against late payment fees was also instituted to override another ESC conclusion around the same time.) The wrongful disconnection policy was not the result of evidence or testing of options, and its reason for existence has been recalibrated a number of times over the years to create some sense of being currently fit for purpose.

This leads to our third point, which goes directly to the statements made by DPI that VERR will be created "where it has been demonstrated that Victorian customers will be materially disadvantaged in the national framework". Nothing in DPI's paper has demonstrated material disadvantage, with DPI apparently taking the view that any potential for a lessening of a current provision would by definition mean material disadvantage for a customer. This would seem to be a very low hurdle for inclusion in the VERR, and will merely further embed political decision-making rather than good regulatory policy.

Somehow we are back to debating the matter of 'proving' the value of the NECF to outweigh the benefits of the jurisdictional status quo on individual regulatory provisions, when in fact the debate already occurred during the NECF consultation from 2006 to 2010. NECF implementation should not be about picking and choosing different elements of the NECF based on short term regulatory or political concerns. On the whole, customers are better off under NECF because of the flow through of efficiency benefits from retailers not having to simultaneously manage customer service to customers in several different ways. It could even be said the frequent increase in standards that NECF entails means benefit to customers, if we take increased regulation to mean an improvement (which is not necessarily an industry perspective). Rather than choosing to differentiate the approach from NECF at the outset 'just in case' of any lessening of standards in a specific case, the approach should be to assume that the NECF is rolled out across the board and then only look to not do so where the costs specifically outweigh the benefits. In our view, the case has not been made for several of the proposals raised in the discussion paper.

Linked to this last point, the DPI paper uses the word 'omission' twice in its discussion paper when talking about NECF, such as: "We set out the regulation which, when compared against the national framework, was not included in the NECF and the omissions were significant". This choice of language is somewhat disingenuous – very little in the NECF (if anything) is likely to be a substantive omission. An alternative interpretation of a substantive state difference with the NECF as currently drafted is that the NECF drafters chose to not take on the regulation in question because there was no evidence that the regulation was warranted. Given the extensive consultation on the NECF to date, and the fact that the Victorian differences have been raised a number of times, this is a much more likely interpretation.

We address some of proposed VERR inclusions in more detail below.

Retail fees and charges on standing offer contracts

DPI has proposed that the current Victorian limitations on charging late payment fees to small customers (generally) and credit card fees (on standing offers) should be retained once the NECF is implemented. The view put by DPI is that customers otherwise will have new fees imposed on them simply because they transfer to the national framework, leading to potential material disadvantage. There is no discussion regarding the quantum of each fee and how this necessarily leads to material disadvantage (or what material disadvantage may be), or why the NECF did not take on these Victorian-specific provisions.

As noted above, the original policy on late payment fees was a political reaction to certain events in 2004 and has never been the subject of consultation or debate other than the ESC's determination at the time that they should be allowed in certain circumstances. It is also worth noting that the cost to retailers of late payment and card merchant fees are real, and in the absence of direct cost recovery from late payers and users of credit cards, the customer base as a whole provides a subsidy. The cross-subsidy present in this case could be argued to provide disadvantage to those customers who pay on time and pay through means that do not incur fees for retailers.

If we are to accept that it will not be politically palatable for the VERR to exclude these provisions on retail fees and charges, we at least request that a sunset clause is built into these aspects of VERR, with a review period prior to the sunset date. A reasonable sunset date would be 1 January 2014.

Gas billing cycle for customers on standing offer contracts

Origin understands why DPI has proposed to keep the current Victorian billing cycle for standing offer gas customers in the VERR, and agrees with the need for some longer transition for customers than would be afforded with a mid-2012 shift to NECF as currently contemplated. We support the proposal to preserve the existing gas billing in the VERR until 31 December 2014, to provide retailers sufficient time to inform their customers of the new arrangements and for customers to make alternative contract choices.

Energy efficiency assistance to hardship customers

DPI has advised that it is appropriate to continue the existing Victorian requirements on retailers to offer free or subsidised home energy consumption audits and flexible options for the purchase or supply of appliances. Origin has always supported these actions, and, in fact, led the way in providing these services free to customers for some time before the regulation was drafted. However, the principle still remains that national consistency is the objective, and in the absence of analysis of the costs or benefits of this policy there cannot be a conclusion about 'material disadvantage'. Surely the recent ending of the Victorian government's Home Wise and Water Wise programmes will result in more material disadvantage for consumers in this area.

A review of the recent ESC performance reports show limited use of energy efficiency audits and appliance assistance, and our own experience is that customer take-up for these services is not high and they reflect very specialised forms of assistance. We would also argue that providing in-home energy audits and appliance purchase options are not customer protections, as they go well beyond the core function of an energy provider.

We suggest that DPI go back to the arrangements and expectations that were in place when this provision was created, and assess the relevance of these against the current environment. If this is not possible, and we are to accept that it will not be politically palatable for the VERR to exclude this provision, we again request that a sunset clause is built into this aspect of VERR, with a review period prior to the sunset date. A reasonable sunset date would be 1 January 2014.

Compensation for wrongful disconnection

We have commented on the Wrongful Disconnection Procedure above, noting that this was a politically motivated policy and not the result of rational policy analysis or testing of alternatives. This should be a reason to pause for thought before carrying the policy over to a new regulatory environment, and particularly one as comprehensive and well developed as the NECF.

We do not in any way support the carryover of the wrongful disconnection compensation regime to the NECF environment.

In the interim, we look forward to seeing the government implement the ESC's recommendation of January 2010 to limit the payment periods of the policy. The legislation as currently drafted has resulted in strange and unintended outcomes such as prisoners and holiday home owners paid thousands of dollars in compensation for premises they did not inhabit and had not realised had been disconnected. It has been a very long time for the industry and regulator to deal with these expensive and time-consuming unintended consequences of the legislation as it was drafted in 2004.

Timeframes for connecting, disconnecting and reconnecting customers

We note that DPI seeks to retain the 2pm disconnection deadline for Victorian domestic customers instead of moving to the NECF time of 3pm, with a view that implementing the national approach will diminish customer protection standards in Victoria.

Again, there is no analysis of material disadvantage, with the presumption that any perception of a lessening is adequate proof of material disadvantage. A more comprehensive analysis would be preferable, and would include data collection about the incidence of disconnections and reconnections within the required timeframes.

Once again, if we are to accept that it will not be politically palatable for the VERR to exclude this provision we at least request that a sunset clause is built into this aspect of VERR, with a review period prior to the sunset date. A reasonable sunset date would be 1 January 2014.

Bill benchmarking

Origin notes that the bill benchmarking work currently being undertaken at the federal government level has not been addressed by DPI in its discussion paper, other than in the context of repealing Guideline 13. However, the matter of timing needs to be explored.

The JIG Bulletin 1 has advised that the current consultancy on the issue will be complete in October/November this year. It does not seem likely that the bill benchmarking project timing will allow for retailer readiness for 1 July 2012, and we seek some recognition of this from the JIG and its separate jurisdictions. The system changes required to meet the final regulatory obligations will be significant and will have associated costs and time requirements.

We would encourage DPI and other members of the JIG to engage the industry on this matter soon to establish some reasonable expectations.

I would be happy to discuss any aspect of this submission further with DPI, and at your convenience. If you have any queries about this submission please contact me on the number below.

Yours sincerely

[signed]

Dr Fiona Simon Regulatory Policy Manager 03 8665 7865 – fiona.simon@originenergy.com.au