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19 May 2011

Dear Raif,

DPI Discussion PaperEnergy Customer Contracts (Victoria) Transition Issues SP AusNet Submission

SP AusNet welcome the opportunity to comment on the DPI Discussion PaperEnergy Customer Contracts (Victoria) Transition Issues (the DPI Paper).

Whilst understanding the MCE/SCO motive to move to align contracts to the NECF model, SP AusNet are concerned regarding the potential impact on the basis of the distributor – customer relationship if this is done without full consideration of these impacts.

Our detailed comments are provided in the attached. In summary our positions on the matters raised by DPI are:

  • There are a number of issues and uncertainties in electricity with respect to transitioning from existing deemed arrangements but it is accepted that provided these issues are given consideration in the transitional arrangements, this is an appropriate approach.
  • For gas where there is no existing distributor – customer contractual relationship, these issues as a result of moving to the NECF based deemed distribution contract could be more prominent, but again it is accepted that provided these issues are given consideration in the transitional arrangements, this is an appropriate approach.
  • However where existing "individualised" contracts exist, the possibility of inconsistencies between these contracts and the NECF regime impacting on the agreed customerdistributor relationship is sufficiently real for the preferred approach to be that existing contracts are grandfathered without provision for recognition of these inconsistencies.
  • To provide certainty for relationships and contracts under development at the effective date of the NECF these contracts should be allowed to complete under the existing regime and be grandfathered as per contracts existing at the effective date.

If there are any further details you require of our position please contact us.

Yours sincerely

Peter Ellis For Julie Buckland Director Strategic Regulatory Programs

Attachment

Whilst SP AusNet has not done a detailed analysis of the potential impacts, we consider that there are indications from our internal assessment to suggest that there are likely to be sufficient inconsistencies between our current relationships with customers and the NECF framework to create issues and impacts on that relationship.

The following is a summary of the current SP AusNet relationships and contracts with our customers:

For electricity:

  • The deemed Standard Terms and Conditions Electricity Distribution Contract (the current deemed electricity distribution contract) applies to all customers.
  • For the majority of customers (greater than 90%) the agreement for Connection Services, and aspects of the Supply Services over and above the current deemed electricity distribution contract, are implied from the Electrical Work Request form submitted by the customer's contractor; the B2B transaction from the Retailer on behalf of the customer; and the various Customer and Distributor obligations in the Electricity Distribution Code (including the reference to installation standards and hence obligations to confirm to the Distributors' Service and Installation Rules).
  • For most of the remaining customers, in addition to the deemed contract there is a specific connection contract. Most of these connection contracts are built around a series of SP AusNet developed standard contracts applicable to different connection and supply scenarios. These include for example connections with pv cell generation, minor extension, low voltage substation, residential subdivision, embedded network, etc. These contracts include a schedule with specific details, and potentially with other specific requirements in a covering letter. These contracts include both connection service and supply service aspects of the distributor / customer relationship. These could include such matters as easements, access arrangements, etc, for both connection and for on going supply support.
  • For a small number of customers the connection contract is more specifically developed and is truly an negotiated contract with potentially a number of rounds of developing the agreed best match between the customers requirements and the network capability and costs.

For gas:

  • Whilst the GDSC provides a detailed listing of what is to be in a Deemed Connection Contract with respect to what is required from the customer, as stated in the DPI paper we do not have such a contract with gas customers on our network.
  • Further we do not have contracts with the up to 10% of customers who require supply services and connection services above the "base" level and for which the distributor must provide specific additional works and services, and the customer must commit to additional obligations.
  • Rather the only industry contractual arrangement with customers is between the customer and their retailer. The content of these contracts is not generally known to the distributor even though these are the basis of the obligations on the customer with respect to their installations. Whilst for the 10% of the customers with above "base" level requirements as identified in the dot point above the distributor is the source of the details of the necessary works and the obligations required of the customer, the distributor does not directly contribute to the content of the resulting contract, nor have access to that contract.

It is on the basis of these existing contractual arrangements that the following input is made on the DPI's specific questions in the DPI Paper:

DPI Question 10 How should the transition from electricity deemed distribution contracts to the NECF be treated?

We are currently in the process of carrying out a detailed tabulated comparison of the current deemed electricity distribution contract against the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" (the NECF model T&Cs)1. The preliminary work carried out to date indicates that there may be some aspects of the current deemed electricity distribution contract which are not adequately covered by the NECF model T&Cs.

This would appear to present an issue with respect to the DPI's suggested approach of just replacing the current deemed electricity distribution contract with the NECF model T&Cs

Further there are a number of clauses in the Victorian Electricity Distribution Code (EDC) (which are imposed on customers through the current deemed electricity distribution contract) which define a number of further customer obligations above those in the current deemed electricity distribution contract.  Our preliminary work in comparing the NCEF and the Victorian customer regime indicates that a number of these EDC based customer obligations are also not specifically imposed in the NECF.

Hence there are a number of gaps in the NERR Model T&Cs which would lead to customers not getting an understanding of all their obligations (and our obligations) when viewing their deemed NERR T&Cs based connection contract. This could lead to misunderstandings and issues between distributors and customers regarding their relative obligations. This is not consistent with the outcome of the NECF which was to provide greater certainty for customers in their industry relationships.

Given the lack of specific detail regarding how DPI is going to handle the current Victorian regulatory documents and any obligation gaps, it is difficult to suggest a solution to the issue. However there is some evidence that just substituting the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" for the current deemed electricity distribution contract will not provide the customer with the desired level of completeness regarding their obligations.

However whilst there are issues as outlined above which need to be given consideration, SP AusNet consider that the DPI proposal to impose the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" and remove the current deemed electricity distribution contract is a reasonable part of the transitional program.

Given that in general the bulk of customers have not accessed the current deemed contract (rather their understanding of the distributorcustomer relationship, if the have given it any thought, would be through our distributed Charter), a bulk change to the new NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" is unlikely to produce large numbers of customer contract issues raised because of real or perceived differences of the current SP AusNet deemed distribution contract compared with the NECF contract provisions.

However consistent with the requirements and intent of Clause 72 of the NERL, SP AusNet assume that the obligation on the distributors will be to provide notice to all customers of the change of their deemed distributor contract. In considering the details of this obligation the DPI and industry need to consider the matters raised above regarding the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" not representing all the customers' obligations. Further there would be some expectation that this notification will lead to a period of customer contact regarding details, not only of the changes, but with respect to the broad customer obligations and the distributor / customer relationship.

Note: the NECF does not appear to have any provision for the NECF Deemed Standard Connection Contract to apply to existing customers who are already connected and energised. Whilst NERL Clauses 70 and 72 deal with new connections and energisation or reenergisations, and changes to in place contracts, there is no mechanism for the imposition of a contract on an existing customer with a non NECF based contract (or no contract).

DPI Question 11 Do any issues arise in respect of establishing a new contractual relationship in gas?

As stated in the DPI paper and as outlined in the summary above of our current customer contractual arrangements, we do not have Deemed Connection Contracts with our gas customers.

This is not to say that there are not a range of requirements on customers for which we rely for the correct functioning of our relationship with the customers. As outlined above the GDSC contains a detailed listing of a range of required customer obligations. SP AusNet has not done an analysis of whether this listing is accurate and complete. We have not for example compared this to the customer obligations in the current deemed electricity distribution contract and the EDC.

However we have no idea of what the retailers have been putting in their contracts with their customers (in the energy contracts we have seen there is virtually nothing re connection and supply mutual obligations). We are concerned therefore regarding the implications of transitioning from what these current retailer contracts state regarding the customers' obligations, to the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts".

Whilst at least notionally the management of these issues will be on the retailers who currently have the customer contracts, any customer issues are likely to involve the distributor, and potentially will involve only the distributor as the current retail contracts may be very short of details of the customers' current obligations.

Further it is unclear what the DPI proposed to do in its transitional legislation with respect to any distributor provided service arrangements or customer obligations which are presently written into the retailer / customer contracts. Will these remain in place? If they remain in place what will be the situation where there are inconsistencies with the contractual arrangements in the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts"?

Hence the points we have raised in 10 above with respect to potential electricity customer contract issues, are likely to be more strongly and more widely applicable to gas customer obligations. This is likely to require distributors allocating resources to the handling of customer queries once customers are notified of their new contractual arrangements, and could lead to potential challenges to some of the customer obligations which may be left unsaid in the current regulatory and contractual framework.

However whilst there are issues as outlined above which need to be given consideration, SP AusNet, consistent with our view in Item 10 above with respect to the electricity transitional arrangements, consider that the DPI proposal to impose the NERR Schedule 2 "Model terms and conditions for deemed standard connection contracts" is a reasonable part of the transitional program.

DPI Question 12 How should individualised negotiated contracts be treated?

The SP AusNet contractual framework outlined above identifies the form of individualised contracts we have in place for the group of customers not covered by the "base level" arrangements. This identifies that about 10% of electricity relationships are under specific connection contracts (connection services + specific supply services + deemed supply services) which contain some elements of proposal and agreement, but are basically a standard contract for the relevant connection arrangement, and 1% are more fully negotiated contracts. For gas, as stated by DPI the contracts are between the retailer and the customer, but we would expect that 90-95% of these would be through the retailer's standard service offer. The remaining about 5% would require a specific connection contract which may have a supply service component. For these the contract is through the retailer but the network connection and supply service aspects are provided to the retailer by the distributor, and it is the distributor who has the major dependency on the customer meeting their service related obligations.

No analysis has been done in SP AusNet (and we have not seen any other distributor's analysis) of the potential inconsistencies which may exist between the contracts which are currently in place (ie distributor contract with the customers for electricity; or connection and supply aspects of the retailer contracts with the customers for gas) and the "relevant provisions" of the NECF. However although we have no understanding the specifics, it would appear to be a risk that if as likely there are inconsistencies and the NECF provisions take precedence we may "loose" important specific provisions on which we rely for defining the customer relationship.

Allowing precedence for the NECF provisions where there are inconsistencies with current contracts would force the distributors (and probably the retailer for gas) to review in detail every such contract which was not based exclusively on the deemed connection contract . Whilst many of the special conditions in these contracts are for connection service only (ie one off connection details) the contracts also have special conditions regarding ongoing supply services. Whilst we have not to date done any analysis of where these special conditions regarding ongoing supply services may conflict with the NECF provisions, (and the potential instances may be small in number), for these larger customers which are involved, internal due diligence requirements would force us to review each contract specifically for potential issues. A decision would then need to be made as to how the business wants to handle this potential issue with the individual contracts. This is a significant impost on the distribution businesses.

It is SP AusNet's strong view and preference therefore that the electricity distributor customer connection/supply contracts which have been agreed between the parties and for which ongoing working arrangements and mutual obligations exist, should be grandfathered and remain in place with no provision for inconsistencies with the NECF framework to be recognised and specially treated.

The question appears to be even more complicated in gas where our connection and supply requirements are not in a distribution contract with the customer but rather in a retailer contract with the customer. If the DPI's aim in this exercise is, as it appears, to move the contractual framework for existing customers close to alignment with the NECF model, then what is to become of these connection and supply requirements in the gas retailer contracts which in the NECF model are intended to be between the distributor and the customer?

Whilst the DPI has recognised the linear relationship that exists in gas, there is no specific proposal as to how the distributor connection and supply requirements in the existing gas retailer contracts are to be handled. If a strict alignment to the NECF contract framework was the required DPI outcome, these distributor connection and supply requirements would need to be "transferred" to a distributorcustomer contract. This appears very messy.

Whilst the standard "base level" connection and supply requirements will be picked up in the deemed distributorcustomer contract under the NECF, any specific distributor requirement above these base requirements will not. It is not clear to us how the DPI proposed generic approach regarding contract transitional arrangements would be implemented given the nature of the current gas contracts. These cannot be simply novated to the distributor as the bulk of the contracts presumably cover customer – retailer energy sales aspects of the relationship.

Is the DPI proposing that whilst for electricity the government as a matter of principle is to use the "inconsistency approach" to force existing contracts closer to the NECF model, yet in gas leave the retailer contracts in place which is absolutely inconsistent with the NECF model?

Note: Under DPI Question 10 above we have pointed out that the NECF does not provide in itself a mechanism for replacing a preNECF deemed contract with a NECF Deemed Standard Connection Contract. Likewise it does not provide a mechanism for a preNECF "individualised" contract to be replaced with a NECF Deemed AER Approved Standard Connection Contract. Although SP AusNet has not considered in any detail how we will structure our customer contracts under the NECF regime, one option is to establish our current range of "standard" connection contracts as NECF Deemed AER Approved Standard Connection Contracts. However currently we would not get support from NECF for these to be deemed as the applicable customers' contracts.

DPI Question 13 How should customers who are in the process of procuring new connections to premises be treated in the transition?

At any point in time there will be limited numbers of individualised contracts moving through the various stages of establishing the distributor – customer relationship. However given that some of these relationships and contracts can be complicated and can take some time, SP AusNet are unsure how industry/DPI would define in a manner clear to distributors, retailers, and customers a clear milestone point in the relationship establishment "process" where a distributor – customer relationship and contract started under the existing arrangements would be obligated to be concluded under the NECF arrangements.

Hence there would be considerable advantage if the transitional arrangements would allow all contracts where the relationship was initiated before the NECF effective date to continue and conclude under the current/old regime and be grandfathered as being NECF contract compliant.

We accept that this cannot be open ended and would propose that a transition phase of six months be allowed such that contracts started under the current/old regime but not finalised in six months must be concluded under the NECF arrangements. The newly approved connection offers would be the basis of all relationship establishment and contracts commenced after the NECF effective date.


1 We are disappointed that the DPI has not to date released their work which we understand has been done comparing in detail the NECF and the equivalent Victorian regulatory regime documents.