Contracts for the supply of energy (electricity and gas) to "small" end-use customers in Victoria are subject to a regulatory framework concerning the terms and conditions of those contracts. Similar arrangements currently exist in other States and Territories in Australia.
The Council of Australian Governments (COAG), under the Australian Energy Market Agreement (AEMA), agreed in 2006 to the transfer of regulatory arrangements for energy retailing and distribution to a national framework. This work was split into two packages – an 'economic' regulatory framework was established in 2007 for electricity through amendments to the National Electricity Law (NEL) and in 2008 for gas through the National Gas Law (NGL). The 'non-economic' package is the National Energy Customer Framework (NECF), to be enabled by the National Energy Retail Law (NERL) which was passed by the South Australian Parliament in March 2011.
The NECF establishes a new national regime for the regulation of energy customer contracts, to supersede and replace the current Victorian arrangements.
This discussion paper sets out some of the issues that Department of Primary Industries (DPI) staff see arising in the process of transitioning regulatory arrangements to the NECF in Victoria, and proposals for addressing those transitional issues.
1.1 DPI's approach
DPI is the relevant agency providing policy advice to the Minister for Gaming, Consumer Affairs and Energy on Energy matters. As such, it is responsible for preparing draft legislation for the Victorian Government to implement the NECF.
The Ministerial Council on Energy (MCE)1 has nominated a target implementation date of 1 July 2012 for all jurisdictions to commence the NECF. DPI is working to achieve this timeframe.
Submissions and other responses to this discussion paper will be taken into consideration by the Department in formulating draft implementing legislation for the NECF, tentatively to be titled the National Energy Retail (Victoria) Bill.
1.2 Making submissions
Submissions are preferred in electronic format and should be provided to the Department of Primary Industries by Friday 13 May, 2011.
Via email: firstname.lastname@example.org
Or mailed to:
Principal Policy Officer
Energy Sector Development Division
Department of Primary Industries
GPO Box 4440
Melbourne VIC 3001
The Department encourages respondents to make their submissions available publicly. Unless certain sections of submissions are marked 'IN CONFIDENCE', all sections of the submissions will be treated as public documents and will be placed on the Department's website www.dpi.vic.gov.au for public access. Formal requests for confidentiality will be honoured; however, Freedom of Information access requirements still apply to confidential submissions.
2.1 Victorian energy customer contracts
Energy customer contracts in Victoria currently exist for the supply and sale of energy between retailers and customers in electricity and gas, and for distribution and supply between distributors and customers in electricity.2
2.1.1 - Retail
Access by small customers to energy (as it is an essential service) is underpinned by the requirement that retailers publish and make available a standing offer of certain tariffs, terms and conditions. The fundamental requirement to make a standing offer is specified in retailers' licence conditions as enabled by s. 35A of the Electricity Industry Act 2000 (EIA) and s. 42 Gas Industry Act 2001 (GIA).
Currently, all 'mass market' retail licences contain a condition that the licensee must offer to sell (on its standing offer) to all domestic or small business customers, where it is the 'relevant licensee' (either the financially responsible retailer for a connection point or a local area retailer).3
The terms and conditions of standing offers are written and specified by the retailers, but subject to s. 36 the ESC may regulate the terms and conditions of these contracts. Under this power, the Commission has determined that the contracts must be consistent with the Energy Retail Code4, which provides very detailed and specific guidance on what standing offers must provide.
Market contracts are a type of retail energy contract that may be entered into as defined by the Energy Retail Code, that is not a deemed contract nor one that arises from acceptance of a standing offer. The Code regulates these contracts as per s. 36 EIA & s. 43 GIA.
The terms and conditions of market contracts are allowed to vary more than those of standing offers or deemed supply contracts by the Code, through the variable sections specified in Appendix 1 of the Code.
In practice, most retail energy contracts entered into by customers in Victoria are market contracts.5 These form the bulk of commercial offerings of competing retailers in Victoria.
Dual fuel contracts are a subtype of energy contracts under the Code, and are defined as follows:
Dual fuel contract means an energy contract for the sale of electricity and for the sale of gas by a retailer to a customer, or two energy contracts between the same customer and the same retailer, one an electricity contract and one a gas contract, under which billing cycles for electricity and gas are synchronised.6
An "energy only" contract is a form of energy (electricity) contract where the retailer only enters into an arrangement for the sale of energy to a customers premises, and does not procure or pay for network services at those premises. Most frequently, these contracts are entered into where a customer is taking supply from an intermediary distributor such as an inset/embedded network, so preventing the usual customer-retailer-distributor relationship from forming.
Special provisions for these types of contract are included in retailers' licence conditions and Use of System (UoS) agreements between distributors and retailers.7
The contractual terms of these contracts are the same as for other energy contracts, but the applicable tariffs may differ, especially through the non-applicability of distribution tariffs to the individual customer.
Deemed supply arrangements apply to ensure that there is a contractual basis for supply of customers who have not entered into a formal contractual arrangement, particularly move-in customers (who have moved in to energised premises) and carry-over customers (whose previous contract has expired).
These arrangements are empowered by s. 39 of the EIA and s. 46 of the GIA. The terms, according to the Energy Retail Code, are the same as for standing offers.
Prior to the introduction of full retail contestability (FRC) in electricity, customers - particularly small customers – were supplied by energy retailers on a franchise basis (these customers did not have a say in who their retailer was to be). At the introduction of FRC arrangements were put in place (see s. 37 EIA and s. 44 GIA) for the contractual terms of supply to these customers to be the standing offer terms as defined by the ESC in the Code. Customers who have inhabited the same premises continuously since 2001 and have not chosen a new retailer may be classified as former franchise customers.
Retailer of Last Resort
Section 49E of the EIA and s. 51E of the GIA provide for specific published contracts for supply of customers of a failed retailer by retailers of last resort (RoLRs). The ESC has determined that the relevant tariffs, terms and conditions should be the same as for standing offers for small customers8, but has declined to regulate these for large customers.
Large customers fall outside the definition of "relevant customer" under the EIA & GIA, and thus the retail contractual arrangements determined by the ESC under the Code do not apply. It is to be expected therefore that there are a multiplicity and diversity of contracts falling into this loose definition, with less commonality in tariffs, terms and conditions than in the regulated sectors of the market.
Division 5A EIA specifies separate contracts that must be made available to customers for the purchase of energy generated by small renewable generation (under the "fair and reasonable" feed-in-tariff obligation), and from solar photovoltaic panels under the premium feed-in-tariff regime.
No national feed-in-tariff arrangement is proposed as part of NECF.
In the electricity sector, deemed distribution contracts are enabled through s. 40A of the EIA. These contracts provide the default contract that exists between customers and distributors. These contracts must be published in the Government Gazette in order to take effect. Deemed distribution contracts must be consistent in their terms with the Electricity Distribution Code9 which provides for regulatory guidance in terms of liability, indemnity and force majéure. These contracts also have the effect of requiring compliance by customers with provisions of the Code.
Deemed distribution contracts have been gazetted by all five licensed distributors and are in effect between distributors and customers in Victoria.
It is probable, however, that individualised distribution contracts are also in place between distributors and some customers. DPI is not aware of where these contracts may have arisen as this is a commercial matter for the businesses and customers concerned. However, if any such contracts have arisen and pose issues for the regulatory transition, then these are best brought to DPI's attention in response to this paper.
In gas, s. 48 also provides for deemed distribution contracts. However, it is understood that no deemed distribution contracts have been gazetted by gas distribution businesses and hence the contractual relationship between distributors, retailers and customers in Victoria is effectively 'linear' – that is, the retailer is responsible for the provision of all services to a customer's premises.
Again, however, individualised contracts for the distribution and supply of gas to retail customers may have been entered into on some occasions. If such contracts do exist and pose issues for the regulatory transition, these should be brought to DPI's attention.
2.2 NECF energy customer contracts
The structure of regulated contracts under the NECF is similar to existing Victorian arrangements but the NECF does exhibit some important differences.
At a basic level, the contractual arrangements are affected by differing definitions for customer types. Whereas under the Victorian framework, small customers include all residential customers and small business customers consuming less than 40MWh/a (in electricity), under the NECF this latter threshold rises to 100MWh/a. However, the NECF introduces a new class of customer (a "small market offer customer") covering small business customers consuming between 40 and 100 MWh/a.
The classes of contract are explained below.
Standard retail contracts (standing offer)
The NECF's standing offer is substantially equivalent to existing standing offers in intent and regulatory execution. The NECF takes a more prescriptive approach to the terms and conditions of these contracts, setting out the "standard retail contract" in a model contract under Schedule 1 of the National Energy Retail Rules (NERR). The tariffs must be published, and each retailer must have and publish its standing offer including the standard retail contract.
The availability of the standing offer is substantially similar to the arrangements put in place in Victoria in 2009 with the removal of retail price regulation, with the obligation to offer supply placed on the financially responsible retailer, or local area retailer as relevant.
However, it should be noted that retailers may satisfy their obligation to offer supply to "small market offer customers" by offering a market retail contract instead of the standing offer.
Market retail contracts
Market retail contracts (MRCs) are the other type of contract available to small customers under the NECF. MRCs are subject to regulated minimum terms under the NERR. This contract type is analogous to market contracts under the Victorian framework.
The NECF does not deal specifically with dual fuel contracts except in respect of disconnection procedures, and the relevant definitions and provisions are specific to this context.10 The definitions used do appear to be compatible with the existing treatment of dual fuel contracts in Victoria, however.
Division 9, Part 2 of the NERL provides for deemed supply arrangements for move-in and carry-over customers. These provisions require the designated retailer to supply deemed supply customers in a supply arrangement based on the standing offer tariffs, terms and conditions.
The NECF specifies the arrangements for supply of customers of a failed retailer by retailers of last resort. For small customers, a deemed arrangement is put in place for 3 months following the RoLR event on terms and tariffs equivalent to the RoLR's standing offer11. For large customers, a deemed arrangement is put in place for up to six months following the RoLR event, on tariffs, terms and conditions as published for this purpose by the RoLR.12
Large customer contracts
The tariffs, terms and conditions for large customer retail contracts are not regulated by the NECF, meaning that there is no effective change to the regulatory environment for these customers.
The NECF puts in place a direct contractual relationship between distributors and customers in both the electricity and gas sectors. This means that there will be a more substantial change in arrangements for gas customers than electricity customers in Victoria.
Deemed connection contracts
The 'deemed standard connection contract' is one which is deemed to be entered into by distributors and retail customers connected to the network. The terms and conditions of these contracts are set out in Schedule 2 to the National Energy Retail Rules (NERR) as a model contract. Distributors must adopt and publish a standard form of connection contract following this schedule with its required inclusions and variations.
The standard connection contract applies to all customers by default. However, distributors may propose to the AER alternative deemed contracts for classes of large customers. These are known as 'deemed AER approved standard connection contracts'. The rules provide for the substitution and amendment of these AER approved contracts.
The connections framework, which is proposed to be inserted into the NER and NGR as part of the NECF enabling amendments, also provides for regulated connection offers to customers to establish new connections to premises. Three types of offer are specified:
- Basic connection offer - Distributors must have at least one standing offer for a basic connection service, which must be approved by the AER.
The basic connection service must be suitable for a substantial proportion of customers within a distribution area.
- Standard connection offer - Distributors have the option of offering additional (standard) connection offers in addition to their basic service(s) if they require a standard contract for certain types of customers. The standing offer must contain the same elements as identified above for the basic service, and is also subject to AER approval before it can be offered to customers.
- Negotiated connection offer - The negotiation framework allows customers to negotiate an individual connection agreement following a simplified stand-alone negotiation framework (NER Chapter 5A Part C, NGR Part 12A Division 3).
In the case of electricity, the negotiated connection must satisfy the minimum terms and conditions included in the schedule to Part 5A.
These 'offers' include terms and conditions pertaining to the process of new connection. The terms and conditions of these offers are deemed, under the connections rules (Proposed Part 5A NER & Part 12A NGR) to form a part of a customer's deemed connection contract.13
The NERL (s. 78) also provides for the negotiation of 'negotiated connection contracts', which may be negotiated between distributors and customers. Negotiation of these contracts may occur under the negotiation frameworks specified in Chapter 5A NER and Chapter 12A NGR for negotiated connections.
As the Victorian regime is retired in deference to the national framework, the contractual arrangements and entitlements of customers must be carefully handled. DPI needs to set out an approach to managing transitional issues that may appear.
We would expect that the commencement of the NECF is accompanied by the cessation of the availability of most forms of existing regulated contract (the feed-in-tariff arrangements being the exception). However, most customers will already be taking sale and supply of energy under existing regulated contracts as the regulatory regime changes.
Victoria will attempt to coordinate its handling of customer contract issues with those of other jurisdictions to the extent possible.
To this end - for the purposes of decision making for the transition from existing customer energy contracts (entered into under current jurisdictional regulatory regimes) to the new contracts under the NECF Laws and Rules -DPI will seek to adhere to the following policy principles:
- The transition should be implemented with minimal disruption for customers and existing customer contracts.
- Where possible there should be no diminution of customers' existing/accrued contractual rights.
- Customer contracts should be made compliant with the NECF as soon as reasonably possible.
- For in-flight contracts (i.e. where procedures have commenced for a small customer to enter into a jurisdictional energy contract, but the process is incomplete at the start date) - the general policy approach should be that customers should not be disadvantaged by whatever transitional arrangement is agreed.
3.2 Retail issues
3.2.1 Small customers
The roughly 2 million households in Victoria and the small business sector are supplied by retailers under the existing standing offer, market contract, former franchise and deemed arrangements. The NECF, by contrast, has its own concepts of standing offer and market retail contract.
Customers' rights and obligations will be substantively set out by the NERR, and this will supersede the provisions of the Energy Retail Code against which existing standing and market offers are developed. Therefore, there is a risk of inconsistency between the provisions of current contracts and the NECF.
It would be desirable for any inconsistencies in existing customer contracts to be ironed out as the NECF is introduced. Achieving this quickly needs to be weighed against the risk of disruption, confusion and inconvenience to customers arising from changes to their contracts.
For standing offers, the NECF standing offer is largely identical in structure and objective to the standing offer under the Victorian regime. Customers taking the standing offer are effectively taking deemed terms and have left the determination of the terms and conditions of their supply to the regulator. Therefore, there seems to be no practical impediment to deeming customers on standing offers to be transferred to their retailer's NECF standing offer at the commencement date of the NERL.
However, the parties may also have accrued rights under the existing standing offer contracts. Notwithstanding the intention that the Victorian standing offers be replaced by NECF standing offers, it is proposed that accrued rights and obligations arising from the prior contract at the time of transition be preserved.
Market contracts are more diverse, and customers have more choice in the tariffs, terms and conditions of their supply when they enter into these contracts. It is not possible to deem Victorian market offers to be market retail contracts under the NECF at the outset, as there is no single market retail contract that can be identified as equivalent to any given Victorian market offer.
Market contracts may be of a fixed term (12 and 24 month contracts are prevalent in the mass market), or they may be effectively 'evergreen', with no fixed termination date. The term of the contract may affect how it is to be treated in the transition.
Three approaches could be taken to handling the transition to NECF:
- The replacement of previous contracts with new contracts consistent with the NECF could be a requirement on retailers at the commencement of the NECF;
- Retailers could be required to renegotiate contracts with customers to ensure they are compliant with the NECF's requirements, but be given time to comply; or
- Existing contracts can be allowed to continue, but will be invalid to the extent that they are inconsistent with the NECF.
The first option appears unnecessarily disruptive, and is not favoured, although it represents the cleanest 'break' to transition to the new arrangements.
The second option would also require re-opening customer contracts for amendment, and retailers would need to be given authority to do this. However, it could take place over a longer period of time (e.g. 12 months) and be less disruptive and involve customer consent.
The third option allows for old contracts to continue (possibly indefinitely, in the case of 'evergreen' contracts), but will be subject to the proviso that if these are inconsistent with the requirements of the NERR, the NERR will prevail. This would not require any re-opening of contracts with customers, but may lead to confusion and disputes where one party or another has recourse to the NERR rather than contractual provisions.
The handling of such disputes is a matter for deliberation. It would seem most appropriate for small customer disputes to be generally handled by the Energy and Water Ombudsman (EWOV). However, other options such as a third party mediation service might be appropriate for some classes of customer.
It appears that existing dual fuel contracts should be treated in the same way as other standing offers or market contracts, as relevant.
The treatment of energy only contracts in Victoria is subject to some particular requirements that are not replicated in the NECF.
Currently, while the ability for electricity retailers and distributors to enter into energy-only and direct-billing relationships with customers, respectively, is embodied in the Use of System Agreements between retailers and distributors, retailer licences place some specific limitations on the circumstances of these. The following licence condition appears in most retailer licences (but not all – note that the underlined section does not appear to be a condition in all licences).
5.1 The Licensee must not enter into a contract for the sale of electricity with a relevant customer unless the contract also provides for the provision or procurement by the Licensee of distribution services.
5.2 Clause 5.1 does not apply if:
(a) the relevant customer has informed the Licensee in writing that the relevant customer has entered into an agreement with a licensed distributor for the provision of distribution services; or
(b) the relevant customer takes an intermediary distribution or supply of electricity (as defined in the General Exemption Order) from a distributor exempt from the requirement to hold a distribution licence under the General Exemption Order. However, if this exception applies, the Licensee must pay the exempt distributor the distribution network charges which would have been charged by the relevant licensed distributor in respect of that customer if that customer were supplied directly by that relevant licensed distributor instead of being supplied by the exempt distributor.
The underlined text would have the effect of requiring customers of exempt distributors to pay pro-rata distribution charges, roughly equalising their overall energy bills with equivalent customers who are directly connected to distribution networks.
The implications of these provisions for customers on energy only contracts is unclear at present. Nevertheless, it is proposed that customers on energy only contracts be transitioned to NECF contracts on a similar basis to other customers, depending on whether their contract is a standing offer or market contract.
It is further assumed that retailers who currently serve customers on an energy-only basis will also have equivalent offerings that can be made available to these customers under the NECF. Some level of assurance may be sought from retailers that this will be the case.
Those customers who still remain on former franchise customer supply arrangements have effectively been taking retailer standing offers since 2001. It is proposed that these customers therefore be transferred to NECF standing offers along with standing offer customers.
The RoLR arrangements under the NECF should commence with little disruption to any current customer contractual arrangements, except in the event that a RoLR event happens close to the date of commencement.
If a RoLR event does occur and Victorian customers are placed on RoLR contracts under the Victorian RoLR regime, then they will be effectively supplied under a standing offer, although they may be charged a one-off fee by their new retailer.
The appropriate treatment of such customers would appear to be treating them consistently with other standing offer customers, but preserving any accrued rights and obligations of both parties from the pre-existing arrangement.
Victorian customers on deemed supply are supplied on retailer standing offers. It would be desirable for these customers to be transferred to the NECF standing offer if possible. However, a number of customers in this category may not have established a billing relationship with their retailer, making this impracticable. In this case, the customer may need to be subject to the NECF deemed supply arrangements, which require customers to establish a billing relationship as soon as practicable.
3.2.2 Large customers
As large customer contracts are unregulated under both the NECF and current Victorian arrangements, no action needs to be taken in respect of customers who are considered to be large customers under both regimes.
However, as noted in section 2.2, the NECF contains a different – higher – threshold above which business customers (in electricity) are considered 'large customers'. The effect is that some 'large customers' (i.e. not relevant customers) under the Victorian regime are considered to be small (small market offer) customers under the NECF.
The practical consequence of this is that under the NECF, these customers will be protected by the minimum terms regime under the NERR. They will not, however, be entitled to retailers' standing offers.
The question of inconsistency between current terms and the NERR therefore arises in a similar fashion as for market contracts for small customers, as discussed in section 3.2.1.
The incidence of inconsistency between existing contracts and the NERR may be handled in similar ways, i.e.:
- The replacement of previous contracts with new contracts consistent with the NECF could be a requirement at the commencement of the NECF;
- Retailers could be required to renegotiate contracts with customers to ensure they are compliant with the NECF's requirements, but be given time to comply; or
- Existing contracts can be allowed to continue, but will be invalid to the extent that they are inconsistent with the NECF.
There does not appear to be a need to make specific distinction between small and large customers in the way transitional arrangements are handled in the distribution sphere. Rather, the distinction should revolve around whether the contract is of a deemed kind or whether it has been negotiated between the parties.
Because the overwhelming majority of distribution contracts are of a deemed kind, and the NECF arrangements are dependent on the deemed contract framework under Part 3 of the NERL, it is proposed that a simple bright-line transition of customers to the NECF contracts be provided for.
This transition would be from existing deemed contracts in electricity, or the deeming of a contract where formerly there was none, in gas.
Where individualised arrangements have been agreed to between the parties, it is not proposed that these be altered or terminated. However, if they are inconsistent with relevant provisions of the NECF, then the NECF provisions will take precedence.
The 'connection offers' for new connection under the NECF that form a part of the deemed standard connection contract (for those customers who require them) have no direct precedents under the Victorian framework. However, some customers may have entered into contracts for works by distributors or their agents to procure a new connection. It is not proposed that any specific provision be made for these contracts in the transition as the rights and obligations under those contracts are unlikely to come into conflict with the new regulations in the initial stage.
In broad terms the proposed approach of DPI to transitional provisions concerning customer contracts is that:
- Customers on standing offers be transferred to NECF standing offers at the commencement of the NECF.
- A transition for customers on market offers under the Victorian arrangements to market retail contracts under the NECF be specifically provided for.
- No specific provision be made for large customer contracts (this will be a matter for the parties).
- Distribution contractual arrangements will transfer to the NECF arrangements at the commencement of the NECF.
These views are, however, preliminary, and DPI welcomes stakeholder feedback on the desirability and practicability of this approach.
Figure 1: Mapping of customer types and contracts - Victoria to NECF
|Contract types||Vic Customer Types||Threshold||Threshold||Nat'l Customer Types||Contract types|
|Retail||Standing offers||Small Customers||All resi, small business to 40MWh/a / 1000GJ||All resi, small business to 40MWh/a / 400GJ||Small Customers||Standing offer|
|Deemed supply||Deemed supply|
|Former franchise customers||Market retail contracts|
|Large customer contracts||Large Customers||Business > 40MWh/a / 1000GJ||Small business 40 - 100MWh/a / 400-1000GJ||Small Market Offer Customers|
|Large RoLR supply contracts||Business > 100MWh/a / 1000GJ||Large Customers||Large customer contracts|
|Distribution||Deemed distribution contracts||All customers||All customers||Standard distribution contracts|
|Other distribution contracts||Negotiated distribution contracts|
|Large Customers||AER approved distribution contracts|
|Small market offer customers|
|Small and small market offer customers|
- Note that the functions of the MCE are to be performed by the Standing Council on Energy and Resources in future.
- See s. 40A EIA. Deemed distribution contracts are also enabled in Gas through s. 48 GIA, but DPI understands that no such contracts have been gazetted to date.
- See the Order under s. 35 EIA published in the Victorian Government Gazette No. S 315 Tuesday 25 November 2008.
- Essential Services Commission (Victoria). Energy Retail Code., February 2010.
- Australian Energy Market Commission. First Draft Report - Review of the Effectiveness of Competition in the Electricity and Gas Retail Markets (Victoria)., October 2007. p. 77.
- See footnote 3.
- See for e.g. Clause 5 of most retail licences, Clause 3 of Use of System agreements.
- Essential Services Commission (Victoria). Final Decision - Energy Retailer of Last Resort., February 2006.
- Essential Services Commission (Victoria). Electricity Distribution Code., March 2010.
- See Rule 117 NERR.
- Although this may be varied by the RoLR's cost recovery scheme – cf. s. 145 (4) NERL.
- Cf. Division 6, Part 6 NERL. Note also that large customers may contract for and nominate an alternative RoLR.
- See s. 5A.F.4 NER