Submission by Origin to the Victorian Licensing Arrangements Issues paperOrigin Energy Limited logo

20 May 2011

Dear Raif

RE: VICTORIAN LICENSING AND CONTRACTING ARRANGEMENTS UNDER NECF

Origin welcomes the opportunity to provide input to the Department's discussion papers on the transition to the National Energy Consumer Framework (NECF): Energy Customer Contracts (Victoria) Transition Issues, and Victorian Licensing Arrangements – Issues Paper. We are pleased that the Department is addressing these matters, and hope that this lead is followed by the other jurisdictions in the interests of national consistency. Overall, we support the direction taken by the Department to date on the issues raised in the papers, subject to the particular points raised in relation to the transitional arrangements for contracts. Please see Attachments A and B for our more detailed responses to the questions asked by the Department.

On the matter of licensing, we agree that there are some aspects of the current regime that are not covered by the NECF but should continue, and would support a move to regulation by the AER and national consistency wherever possible. While it might be challenging to obtain MCE approval for a number of provisions to be managed this way, it would seem to be the only logical means of supporting the direction taken by reform to date, which is about rationalising regulatory provisions and regulatory agencies.

On contracts we believe there is more room for consideration of the retailer's and distributor's legitimate business interests in the principles put forward by the Department. In relation to particular contract types, our view is that it is appropriate to transfer existing standing customers onto new standing contracts that are compliant with NECF. We have a number of comments on the proposals for transitioning market contracts and which proposal is most appropriate will depend to some extent on the details of the way the proposal is implemented. We have also provided suggestions in relation to how to deal with large customers who will become regulated for the first time under NECF.

If you have any queries about this submission please contact me on the number below.

Yours sincerely

Dr Fiona Simon
Regulatory Policy Manager

Attachment A: Origin responses to Contracts Paper questions

As identified in the Department's discussion paper, the NECF and existing Victorian regulatory regime are broadly similar, although there are some significant differences between the two. It is important that clear, workable transitional arrangements are in place to allow as seamless as possible a transition to the new regime for both customers and retailers. Ideally all states would also take the same approach to the transition.

We set out below responses to the questions on which we feel we can provide valuable insight and analysis.

Responses to Issues

Principles

Origin supports the policy principles that the Department has identified. However, the absence of the retailer's and distributor's legitimate business interests is a significant omission. The national energy retail objective, and in particular efficient investment in and operation of energy services, cannot be achieved if the legitimate interests of retailers and distributors are not taken into account. Ultimately it will be consumers who suffer in the long term as a result of this omission.

In addition to this general principle, the Department's first two principles apply equally to the retailer as well as the customer. These criteria are of fundamental importance to retailers, and many business practices and a retailer's risk profile is determined by contractual rights.

Origin proposes the following amendments (see italics) and addition to the Department's proposed principles:

  • The transition should be implemented with minimal disruption for customers, retailers and existing customer contracts.
  • Where possible there should be no diminution of customer's and retailer's existing/accrued contractual rights.
  • The transition should be implemented in a manner which considers and does not have a material adverse impact on retailers' and distributors' legitimate business interests.

Question 1: Is it appropriate to transfer customers on existing standard offers to the corresponding standing offer under the NECF

It is appropriate to transfer customers on existing standard offers to the corresponding offer under the NECF. This approach is consistent with the current process for amending a retailer's standing offer contract – updated terms apply to all customers once they are approved by the Essential Services Commission and published.

There should not be any concerns moving customers onto standing offer terms which each of the states and the Ministerial Council on Energy have determined are appropriate for all customers moving forward.

This approach achieves the Department's principles for the transition (whether or not the amended principles proposed by Origin are incorporated).

Question 2: Are there potential accrued rights and obligations of parties that should be specifically dealt with in the transition?

There are no potential accrued rights and obligations that should be specifically dealt with in the transition.

The key obligations, such as those in relation to payment, including the obligation to pay, and the retailer's obligation to repay overcharged amounts and right to recover undercharged amounts should continue. However, these obligations will be dealt with in the NECF standing offer terms. It is difficult to contemplate what rights and obligations are so important that transitional arrangements would be necessary, but which were not considered important enough to be incorporated into the NECF standing offer.

Additional transitional arrangements would create a significant administrative burden for retailers and will only add, at best, a nominal benefit for customers.

Question 3: How should market retail contracts be handled as the Victorian Energy Retail Code is replaced by the NERR minimum terms regime?

This is an issue of fundamental importance to Origin. With 4.6 million customers (nationally) any changes to the existing contracts and communication with customers will have a significant resource and cost implication for Origin.

As a preliminary point, Origin agrees that the term of a market contract (whether a fixed term of 12 or 24 months, or evergreen) may affect the transitional arrangements for those contracts. Fixed term contracts, by their nature and as a result of the regulatory arrangements specific to fixed term contracts, can be transitioned more readily than evergreen contracts. Therefore, Origin agrees that different transitional arrangements are appropriate for these different type of contracts.

In relation to the precise transitional arrangements to be put in place, Origin has a number of comments on the Department's proposals.

Evergreen contracts

The comments below relate to evergreen contracts. These transitional arrangements for evergreen contracts are particularly important given the nature of these contracts and limited ability to re-open these type of agreement absent transitional arrangements.

Proposal One

The Department has suggested that the replacement of previous contracts with new contracts consistent with the NECF could be a requirement at the commencement of the NECF. Origin has interpreted the proposal to replace previous contracts with new contracts consistent with NECF at the commencement of NECF to mean that no customer consent is required to this replacement. Origin is supportive of this option (with the proviso that this is the correct interpretation) for a number of reasons:

  • Contrary to the Department's conclusion, this would seem to be the least disruptive option for customers as retailers could simply inform customers of their new terms without customers needing to do anything.
  • As recognised by the Department, this would achieve the cleanest "break" from the old regime and mean that retailers would be in a position to comply with the NECF from the date it comes into effect. It is also the only proposal under which it is feasible for NECF compliant contracts to apply consistently across all customers.
  • This would minimise customer confusion, as customers would have certainty as to their contractual terms as they could rely on the words of the contract itself (which would not be possible under the Department's third proposal which involves reading down existing contracts to comply with NECF).
  • It is unlikely to result in a significant diminution of customer's existing or accrued contractual rights in circumstances where the only changes being made are those required to comply with the NECF, which must be considered to be in the long-term interests of consumers.
  • While this arrangement will involve some cost for retailers (as new contract terms must be provided to customers), this option is the least adverse to the retailer's legitimate business interest.

In order to minimise concerns that retailers may exploit this opportunity to update their terms more generally, limitations could be imposed on the retailers' right to develop new terms, including that retailers may only take the most recent version of their market terms (it would be unnecessarily burdensome to have to update all historical versions) and only amend them as necessary to bring those terms in line with NECF. For example, there should be no need for any minimum periods to be extended as a result of the replacement of the terms.

In light of the above this is Origin's preferred option so long as it is not necessary to provide customers with a copy of the new terms as the cost in doing so is significant. Rather, Origin suggests that if this option is adopted retailers should only be obliged to inform customers that new NECF compliant terms apply to them and from what date and direct customers to a website where those terms can be found.

To avoid all doubt, Origin supports this first proposal only on the proviso that no customer consent is required and that retailers do not need to send out copies of the new terms.

Proposal Two

Origin has some fundamental concerns with the Department's second proposal for retailers to renegotiate contracts with customers to ensure they are compliant, but be given time to comply. The workability of this proposal depends on the type of consent required from customers. Origin envisages that any renegotiation would involve a retailer putting together a new set of NECF compliant market terms and presenting them to the customer. Customers would then have to provide either express consent (i.e. taking some positive action to indicate their consent which could be by calling the call centre or returning a form) or inferred consent with a right to opt out (i.e. customers would be taken to consent to the new terms unless they indicate otherwise within a certain period of time).

In Origin's experience campaigns to existing customers requiring their express consent generally see a response rate of between 10 – 20 per cent of all customers contacted (where customers are sent a letter). In light of this, and to minimise the administrative burden on both customers and retailers, if this option was adopted, Origin's view is that an opt out consent should be preferred. In addition, the cost of communicating the new terms to customers and seeking their consent and providing a means of receiving and processing that consent would be significant whether express or opt out consent is chosen. However, it would be higher if express consent is required, particularly as it would be necessary to contact customers by telephone to achieve a reasonable response rate which has a significantly higher cost than contacting customers by mail.

Regardless of which type of consent is adopted, it is necessary to determine how customers who do not consent to the new NECF terms should be treated. The simplest and cleanest treatment is to move non-consenting customers to a standing agreement. However, this is not always the best outcome for customers as any benefits they were receiving under their market contract (such as a discount on standard published rates) will come to an end. It is also not a good customer experience and could lead to numerous customer complaints and confusion. In addition, customers may exploit this opportunity to effectively exit a contract with either a fixed term or minimum period, not because they do not agree to the NECF compliant terms but because they have seen a better offer elsewhere, which would be materially adverse to a retailer's legitimate interests. Obviously retailers will not be able to enforce early exit fees in these situations.

The fact that the treatment for customers who do not agree to new NECF compliant terms may be detrimental to customers reinforces that this proposal is adverse for both customers and retailers and should not be adopted.

Proposal Three

Proposal three is for existing contracts to continue, but be invalid to the extent that they are inconsistent with the NECF. In Origin's view, if the Department's first proposal is not adopted in the way suggested by Origin (i.e. with no consent required and retailers do not have to provide copies of the new terms to customers) the next best proposal is the third proposal. The benefit of this proposal is that it involves no disruption to customers at all and less disruption to retailers than the second proposal, although as recognised by the Department, it may result in some customer confusion.  It also involves less cost to retailers as new terms and conditions would not have to be provided to customers, nor would their consent have to be sought.

We believe that any customer confusion that may arise could be managed by the Government, the ombudsman and retailers having explanations on their websites to assist customers to understand the new regime, and for retailers only, how it impacts their contracts. In addition, given that the obligation to ensure compliance with the NECF ultimately rests with retailers in a practical sense, so long as retailers are in fact compliant this should not be a great cause for concern.

However, if this option is adopted it is likely that many hundreds of thousands of customers will remain on pre-NECF contracts indefinitely. While churn is significant in Victoria (and Australia) there is a significant portion of customers who very rarely change their retailer or move to an updated market offer with their current retailer.

Fixed term contracts

The end of a fixed term contract is an opportune time to provide the customer with updated terms and conditions which comply with the NECF. For fixed term contracts Origin proposes option 3, that is existing contracts can be allowed to continue but will be invalid to the extent they are not consistent with the NECF, until the end of the fixed term. After the end of the fixed term the terms and conditions will be updated with NECF compliant terms, either through an updated market contract or a deemed contract under Rule 48 of the current draft of the National Energy Retail Rules.

Question 4: How should disputes arising between customers and retailers concerning the transition to the new regime be handled?

Origin's view is that establishing a new Victorian only complaints body for NECF related customer complaints is not desirable as this would require retailers to put in place new processes for dealing with this new body and customers to familiarise themselves with the way the new body operated. It would also increase the already numerous regulatory bodies that retailers need to deal with. This also appears to involve unnecessary administrative and operating costs when the Energy and Water Ombudsman Victoria (EWOV) is already set up to investigate and resolve energy related consumer complaints. Given EWOV's familiarity with the existing regime it seems that EWOV would be well placed to assist customers with any complaints they may have in relation to their transition to NECF. However, as with the current regime, customers should continue to be required to refer their complaints to their retailer in the first instance. Therefore, if there is to be a Victorian specific body for resolving customer complaints in relation to the transition to NECF, Origin's view is that EWOV should be that body.

Question 7: If a RoLR event happens immediately prior to the commencement of the NECF, how should the failed retailer's customers be treated?

If a RoLR event happens prior to commencement of NECF the current RoLR regime should be used. Implementing transitional arrangements prior to the commencement of NECF is likely to make a RoLR event unnecessary complex.

Question 8: How can customers receiving supply under deemed supply arrangements best be handled in the transfer?

Origin agrees that to the extent practicable for retailers, Victorian customers on a deemed supply contract should be supplied on the NECF standing offer. If this isn't practicable, Rule 53 of the current draft of the NECF should apply.

Question 9: How should the contracts of 'small market offer customers' be handled in the transition from the Victorian scheme?

The terms and conditions for these customers are an important factor in the retailer's price offering. Origin's view is that the best way to transition these contracts is for customers to be given a choice between:

  • their existing terms and conditions, including pricing, continuing for the contract term, with the terms being valid (irrespective of whether the contract terms comply with the NECF); or
  • migrating to the retailer's market or standing offer terms for a fixed term equivalent to the end of the term of the original contract between the retailer and customer.

This transitional period is unlikely to have a material adverse impact on these customers.

Attachment B: Origin responses to the Licensing Paper questions

Question 1: What should the basis of any limitation on entry to the distribution sector be?

Question 2: What kinds of network infrastructure should be exempted from such a limitation?

Question 3: What measure of competence should be satisfied by a business choosing to build some form of distribution infrastructure?

Overall, we agree with the points made by the Department. Origin would like some certainty about the distribution sector, and expects to see distributors meet some basic requirements to be able to operate. Financial, insurance, technical and transactional aspects of services need to meet some minimum standards and we would see this happening through registration/licensing in some form.

Question 4: What impact will arise from the imposition of regulatory obligations on small scale network operators?

Origin agrees that there are important regulatory obligations contained in various instruments in the Victorian market that are not covered under the NECF. These instruments include the Gas Distribution Code, Electricity Distribution Code, Electricity System Code, Advanced Metering Infrastructure (AMI) Orders in Council and the Public Lighting Code. While these instruments address many Victorian specific issues some aspects are common to other jurisdictions, like unaccounted for gas. However, due to differing market arrangements, they are managed differently in each jurisdiction and initially appear to be not suited for nationally consistent regulation. In the short term Origin suggests that these instruments be reviewed and allowed to continue under Victorian specific regulation instituted by transitional Victorian legislation. In the longer term these provisions should be transitioned under national regulation in a consistent manner, wherever possible, or as specific jurisdictional requirements regulated by the AER.

The perpetuation of any form of existing energy regulation, managed under jurisdictional control, should be avoided to ensure the benefits of NECF are maximised for the long term interests of customers.

Question 5: Is there any reason why Victorian-specific cross-ownership restrictions are required in the energy sector after the commencement of the final national frameworks?

There is no reason why Victorian-specific cross-ownership restrictions are required in the energy sector after the commencement of the final national frameworks. We support a repeal of the cross-ownership provisions of the EIA and GIA.

Question 6: How might businesses that must exercise these statutory powers be identified in the absence of holding a licence?

The Department has stated that it would seem self evident that there is a continuing need for network businesses to have access to the statutory powers of Part 5 of the EIA and Part 7 of the GIA, as works on public and private land is integral to network service provision. However insofar as that function presently "piggy backs" off the businesses being licensed, the issue is how otherwise might the businesses be identified.

Origin considers that the approach taken in Queensland to reticulated LPG, when distribution licences were abolished in 2007, might be worth considering. The government amended the Queensland Gas Supply Act 2003 in order for the owners of LPG reticulations to continue to have rights of access to properties and public land in order to maintain and extend their gas infrastructure. Alternatively new provisions could be inserted into legislation that provides existing access rights to the current distribution companies or their successors.

Question 7: In what circumstances might a network business be required to cease operating?

Question 8: What alternatives are there to appointment of administrators to businesses that are required to exit the energy sector?

Origin agrees with the Department that the likelihood of a regulator revoking the license of a large scale distribution business is extremely low. Actions that might trigger a network business to go into administration would have to be extreme, so extreme as to render this type of action as more an emergency response than a regulatory threat to discourage non-compliance. There is no precedent for this kind of action that we are aware of. What this means is that there is a need for the regulatory toolkit to include the more light-handed options of fines and other disincentives for non-compliance, and a capacity and willingness to enforce.

We agree that some form of national 'step in' right is desirable, and believe the AER should be tasked with the development of a regulatory approach. It is possible that the consideration already given to the RoLR process could be directed toward a DoLR (distributor of last resort), where there is a negotiated settlement with another distributor.

Question 9: What is the appropriate basis for funding the cost of regulation if the licensing regime is ended or substantially modified to accommodate the national framework?

We would like to see ESC and other state-specific entities take on as little as possible and move to a national market. Therefore we would like to see funding the cost of (distribution) regulation through the AER. We are not convinced that licence fees contribute significantly to managing the costs of regulation and expect these costs to be borne by the AER through its usual funding approach.

Question 10: Are there any issues regarding NSW and SA distributors who supply customers in Victoria?

Question 11: Are there any issues regarding Victorian distributors who supply customers in SA and NSW?

There are no issues that we are aware of. Certainly we would expect that the NECF would overcome any issues, which will be all the more possible if there are no carve-outs by jurisdictions and a consistent approach to distributor issues not covered by the NECF.

Question 12: Is there a need to further limit entry to the generation sector (in addition to AEMO's registration role?)

Question 13: Should the small scale generation sector be subject to specific regulatory oversight? If so, should this be through Victorian or national regulatory instruments?

Matters regarding small scale generation (i.e. embedded generation) should be dealt with at least in the first instance through the AEMC's Demand Side Participation Review. This would facilitate the development of national solutions/instruments to address any issues revealed through the Review process.  A national approach is preferable to jurisdiction-specific ones as it would allow for greater clarity and lower the compliance burden for businesses that operate across the NEM.

Question 14: Do any implications arise from shifts from regulatory to statutory requirements?

Question 15: Do any implications arise from the absence or replacement of a licensing regime?

Question 16: Are there relevant considerations for Government regarding the body that grants and revokes an energy authorisation? (e.g. the ESC, the AER, AEMO, the Minister for Energy or the Governor-in-Council?).

Question 17: Can national concepts of authorisation and registration under the NEL, NGL and NERL be relied upon to underpin Victorian statutory obligations and powers, or should nomination, registration and/or authorisation be performed under a Victorian scheme?

Question 18: On what basis might a person be granted (or refused) such authorisation?

Question 19: Are there material costs from the duplication of an authorisation function in the Victorian and national frameworks?

Question 20: What Victorian regulatory arrangements – that are not covered by the future national frameworks – require substantial regulatory oversight?

Question 21: What is the most appropriate and effective enforcement regime for Victoria-specific regulatory arrangements?

Question 22: When and where should customers have the right to take enforcement action?

Question 23: Which body is best placed to oversee Victoria-specific regulatory arrangements?

Question 24: Should Victoria reform small scale licensing activities in concert with the implementation of the NECF?

Question 25: What Victorian regulatory arrangements – that are not covered by the future national frameworks – require substantial regulatory oversight?

Question 26: What impacts arise from abolishing licences if licensing arrangements are to be reformed?

Question 27: Are there any other transitional issues that DPI should be aware of?

Origin does not have specific comments to make on these questions; however, we would like to note that we support a shift to the national regime wherever possible. We would like to see the fourth option in Table 1 pursued further – that is, regulatory requirements are made part of the national framework, with enforcement functions conferred on AER. Leading from this, we also support the 'inverted licensing' option canvassed in Table 2, where AER will licence small-scale providers in some form.

Finally, we believe that these issues should be addressed within a clear timeframe, and consistency between the jurisdictions in how they consider these types of issues would be welcome.