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Dear Raif

United Energy Distribution (UED) and Multinet (the businesses) welcome the opportunity to comment on the DPI Discussion paper titled Energy Customer Contracts  -Transition Issues.

The businesses appreciate the consultation on these important contract issues. The businesses note that the Victorian transition plan and Application Act, the design of the co­regulatory framework, the remaining jurisdictional requirements, the amendments to the NEM procedures and the ability for distributors to recover their costs in this process are all important aspects of defining the scope and implementation of this national energy customer framework.

The businesses have responded on the distributor-customer contract transitional arrangements and also on several transitional matters in relation to energy only contracts and ROLR where we consider the issue is broader than transitional retail contract arrangements.  Our detailed comments are in the Attachment.

In summary our key messages are:

  • The businesses support a simple bright line transition in electricity that replaces the current EIA/licence deemed distributor – customer contracts with the NERR deemed distribution-customer contract
  • However, the businesses do not support the NERR deemed distributor-customer contract being given effect in a manner that has an impact in any way on existing negotiated contracts.
  • In principle, the businesses support a simple bright-line transition in gas where there is no current distributor –customer contract for the connection. The businesses suggest that further consideration be given to the impacts of the retailer's supply/connection contracts co-existing with the NERR deemed distributor - customer contract.
  • The businesses consider that it is inappropriate for Governments to interfere with freely negotiated distributor-customer connection/supply contracts. It is, and always has been, a very significant step for Governments to interfere with the right to contract.  The businesses support the contracts being appropriately grandfathered in line with the already established precedent in the current electricity deemed distributor-customer contracts. The grandfathering of these contracts is the only practical approach.
  • The businesses consider that any in-progress connection offers which are being completed after the NECF start date should be considered compliant with the NECF. Legislative drafting should allow an appropriate transition phase of at least 6 months.  Newly approved AER connection offers would be used from the start of NECF.
  • In conjunction with the transition of energy only contracts, the Government needs to provide policy clarity on the continued existence of these contracts and clarify any limitations on the formation of new energy only contracts in a manner that allows a workable framework and provides the distributor with the ability to remain financially whole.
  • The Application Act should provide clarity that all ROLR provisions are managed under the Victorian regime or all provisions are managed under NECF.  Any legislating of the NECF ROLR contracts needs to be considered in relation to stakeholder readiness to move to the full NECF ROLR framework.

Yours sincerely 

Verity Watson
Manager Regulatory Strategy

Attachment  

Current Distribution Contracts

The DPI has requested in Section 2.2.1 to better understand the nature of any distribution – customer contracts in place which may pose an issue for the regulatory transition.

UED has a number of contracts in place which cover the proposed connection/supply contract in the NERR and the connection contracts in the NER/NGR:

Electricity

  • Supply connection contracts which are generally for large customers (commercial/industrial) with specialised terms.  For example these contracts may include a minimum demand component in order to recover costs for customer site based substations or special customer required substations.
  • Reserve capacity contracts which cover both supply and connection.  These contracts often involve providing supply from a second feeder, additional reliability or quality of supply to meet specific customer needs.
  • Specialised contracts which cover supply and connection.  These contracts again are generally for large specialised customers such as hospitals or waste tips with co-generation. 
  • Embedded network contracts which cover supply and connection.  
  • Small scale embedded generation including photovoltaic cells, these contracts are specialised connection agreements to cover inverter requirements and generation details to meet Distribution Code requirements.  These contracts could be for large or small customers who have installed the generation, they are evergreen for the customer at the premises and significant in number.
  • New connection or connection alteration offers.  These contracts cover a connection offer to a customer and could be in place for small and large customers.
  • Customer extension/augmentation offers.

Gas

  • Gas connection/supply offers are managed via the retailers.  Where there are any additional costs these are channelled via the retailer to the customers. 

Distribution – Customer Electricity Contracts under NECF

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

The DPI paper suggest that it is better to assess the distributor-customer contracts in relation to whether the customer is on the current distributor deemed customer contract or whether the customer has a separately negotiated contract with the distributor.  DPI consider that the small/large customer categories are less relevant for the transitioning of distributor contracts as the majority of customers are on the current deemed contract.

On this basis, DPI propose that the transition is a simple bright-line transition from the current deemed electricity contract to the new NERR deemed distributor-customer contract.

The businesses note that the NERL clause 70 (3) only provides for the formation of the NERR deemed distributor-customer contract for an existing connection when a customer's premise is re­energised or when the(new) customer commences to take supply.  In other words, for an existing connection that is currently energised and the customer is taking supply, there is no provision for the NERR deemed distributor-customer contract to take effect.

Presumably the simple bright line transition as proposed by DPI would require the Victorian Application Act to cater for the scenario of an existing connection that is currently energised and the customer is taking supply and provide that, in this scenario, the current EIA/licence deemed distributor – customer contract no longer has effect and the NERR deemed distributor-customer contract has effect in its place.

Consistent with NERL 72, the businesses are comfortable to support an existing NERR deemed contract being replaced with a new/varied NERR deemed contract.  However the model of the NERL is that a negotiated contract prevails over a deemed contract – see clause 74(a) – and the businesses regard that principle as equally applicable to existing negotiated contracts so that a new NERR deemed distributor - customer- contract should not replace any inconsistent terms in an existing negotiated contract.

The businesses support a simple bright line transition in electricity to replace the current deemed distributor – customer contracts with the NERR deemed distributor-customer contract as long as the negotiated contracts are not impacted in any way (see below).

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

The DPI has sought comment on whether there are any issues in the simple bright-line approach for gas.

There is no existing deemed distributor-customer contract in gas.  The distributor has connection/supply contracts with the retailer as the user of our network.  The retailer has these contracts with the distributor on behalf of commercial/industrial customers. The businesses are not aware of how the formation of a deemed distributor-customer contract for connection/supply may impact the retailer's negotiated contract with the customer for supply/connection.  This may have some impact for retailer's negotiated contracts for maximum hourly quantities or any market contracts with customers.

The businesses note the same issue exists in gas that for existing connections, the NERR deemed distributor - customer- contract is only formed when the (new) customer commences to take supply or a current customer is re-energised.  For a new connection the NERR deemed distributor – customer - contract is only formed when the customer accepts the distributor's connection offer.

The businesses support the simple bright line creation of the NERR deemed distributor – customer contract as long as it does not overwrite existing negotiated distributor- customer contracts. 

In principle, the businesses support a simple bright-line transition gas where there is no current distributor –customer contract for the connection.  The businesses suggest that further consideration be given to the impacts of the retailer's supply/connection contracts co-existing with the NERR deemed distributor - customer contract.

12. How should individualised negotiated contracts be treated? 

DPI state that individual connection/supply contracts should not be altered or terminated.  The businesses strongly support the ongoing validity of these contracts.  Clearly DPI no not intend for each of these contracts to be reviewed and renegotiated prior to NECF commencing.

DPI add that to the extent that the negotiated contract is inconsistent with the relevant provisions of the NECF, then the NECF provisions will take precedence.  In effect, despite DPI's preceding sentence, the negotiated contracts will be altered.  The businesses do not support this proposal.  The businesses have hundreds of contracts which need to be reviewed and assessed as to whether they are workable or not under the DPI proposal. The cost/time to undertake this activity is significant. Without undertaking this detailed review for each contract, the businesses are unable to determine whether the negotiated contract with some NECF provision replacement represents a workable clear contract from either the distributor or the customer's viewpoint.

Most of these negotiated contracts relate to large customers who have willingly entered the contract in order to have substations on site, additional reliability etc. These customers have had the freedom to contract and both sides have negotiated in good faith.  The businesses suggest that legislative drafting should not interfere with these contracts.

The businesses support the creation of this simple bright line transition in the same way that it was managed for the creation/formation of the original electricity deemed distributor-customer contract in 2002 which at that time was approved by the ESC. The transition to NECF should be managed in line with the established approach such that negotiated distributor- customer contracts are not impacted by the transition.

The businesses consider that it is inappropriate for Governments to interfere with customer contracts that have been freely entered into.  The businesses support the contracts being appropriately grandfathered with the need to consider NECF for any newly negotiated contracts.

The businesses note that one option would be for the contract categories we have outlined in the section on Current Distribution Contracts above to be managed by a transition to the large customer deemed AER approved standard connection contract. However, this would require time for the businesses to get AER approved contracts in place, and then a statutory deeming to take place.  As for the deemed standard connection contracts, a deemed AER approved standard connection contract is only formed under NERL clause 76 when a large customer accepts a new connection offer or where an existing connection is re-energised or where a (new) customer commences to take supply.  For an existing connection that is currently energised and the customer is taking supply, there is no provision for the AER deemed standard connection contract to take effect.

There is another problem here.  If on the day the NECF starts a particular large customer is on a current EIA/licence deemed distributor- customer contract and, pursuant to the DPI proposal above, that customer is legislated to be on the NERR deemed distribution-customer contract, that customer will never be able to move to an AER approved standard connection contract under the current NERL provisions because it is an existing large customer at an existing connection that is currently energised and the customer is taking supply.  In other words, the customer will not fall into any of the scenarios in clause 76 of the NERL that allow an AER approved standard connection contract to take effect.

The result is that the AER approved standard connection contract will only apply to re-energised or newly connected large customers but never to large customers taking supply on day one of the NECF.

The NERL clause 78 only provides for the formation of a negotiated connection contract for a small customer on acceptance of a connection offer under the NER/NGR.  If there are any existing distributor – customer connection/supply contracts in place for small customers then these need to be preserved as they are unable to be negotiated under NECF for existing energised connection points for small customers.

It should be noted that there are no equivalent provisions for large customer negotiated distribution-customer contracts and hence these are unregulated.  This policy position in the NECF further supports the approach that the distributors existing contracts be grandfathered until the NECF provisions might be applied ie to a new customer at the connection or on re-energisation.

The businesses consider that it is inappropriate for Governments to interfere with freely negotiated distributor-customer connection/supply contracts.  The businesses support the contracts being appropriately grandfathered in line with the already established precedent in the current electricity deemed distributor-customer contracts.  The grandfathering of these contracts is the only practical approach.

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

In relation to contracts that are more of a connection offer as opposed to the contracts that are ongoing connection/supply, the businesses consider that there needs to be a transition period.  Connection offers prior to the commencement of NECF may be on the old business forms. These connections offers, customer acceptance of connection offers and completion of the work can take between 1-5 months.  The businesses suggest that any offers made in good faith prior to the commencement of NECF under the old business forms continue to be honoured and considered compliant with NECF. This is the most practical approach with the minimum disruption to customers.

There may also be transitional issues if a request made for connection under section 3 of the Gas Distribution Code has not been completed by the time Part 12A of the NGR takes force.

The businesses consider that any in-progress connection offers which are being completed after the NECF start date should be considered compliant with the NECF.  Legislative drafting should allow an appropriate transition phase of at least 6 months.  Newly approved AER connection offers would be used from the start of NECF.

Energy Only contracts

6. What particular issues do energy only contracts present for the transition and how best can they be resolved?

The businesses note that the AER is developing the retail on selling arrangements under NECF.  However the exempt distributor arrangements and associated customer protections are not covered by NECF. The AER consultation on the exempt network arrangements will be part of a future AER consultation and may even be part of ongoing jurisdictional regulatory framework.  Our comments on this question reflect our understanding at this point in time.

DPI recognises that there may be implications for customers on energy only contracts in moving to NECF. The implications in the paper is that energy only contracts exist for customers within an embedded network.  A second tier retailer of a child in an embedded network may have an energy only contract. However meter and data provision services need to be provided by a party accredited under the NER, it is not clear whether these may/must form part of the energy only contract.

The NECF appears to establish an arrangement where the retailer may choose to enter into an energy only contract with a customer in NER 6B.A.2.2 (d).  The retailer must advise the distributor of this arrangement, however the arrangement is able to exist without the need for distributor agreement or a condition precedent that the distributor has any necessary distributor-customer contract in place for the remaining services.

The drafting in this NER clause was added late in the development of the framework, the policy intent is unclear. 6B.A2.2 (d) allows the retailer to have an energy only contract with a customer of any size. It has no limitation placed on whether this customer is directly connected to the distributor's network or to an exempt network.  NERL 71(2), except in relation to connection offer charges, prevents the licensed distributor from direct billing a small customer for any distribution service charges. How can NER 6B.A.2.2(a), which provides for a distributor to direct bill a customer, work with NERL 71(2), which says the opposite?  In addition, NER 6B.A.2.2(a) is inconsistent with clause 5.1(b) of the model terms and conditions for deemed standard connection contracts which provides that charges for customer connection services will be billed under the retail contract.

The NECF arrangements fail to protect distributors in the same manner as the current default UOSA which is approved by the ESC.  In the UOSA, clause 3 (a), the distributor provides distribution services to the retailer except to the extent that the retailer notifies the distributor that the retailer and customer have entered into an agreement under which the retailer does not provide or procure one or some of the distribution services for the customer and the distributor and customers have entered into an agreement for those same services not provided or procured from the retailer.  Both conditions need to be met for the triangular contracting framework to operate effectively.  In the case of an embedded network 2nd tier child, the exempt network may be billing the retailer or customer directly for the DUOS and the licensed distributor would be billing the retailer for any metering services provided. In addition in 6B.A2.2 there is no drafting that limits the energy only contracts to the intent implied by DPI ie to second tier children in an embedded network.

In conjunction with the transition of energy only contracts, the Government needs to provide policy clarity on the continued existence of these contracts and clarify any limitations on the formation of new energy only contracts in a manner that allows a workable framework and provides the distributor with the ability to remain financially whole.

Retailer of Last Resort

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

DPI raise concerns about a ROLR event which might occur prior to the NECF commencement date under the Victorian ROLR framework. In this case, affected customers would transfer to the ROLR retailer on the retailer's current standing offers and the customers would be charged a one off fee by their new retailer.  In this case the affected customers would also need to stay with the ROLR for a period of three months.

Where a ROLR event did occur in Victoria well prior to the commencement of NECF and the event commenced being managed under the Victorian framework, the ROLR arrangements should continue to be managed under the Victorian framework across any NECF start date.

If the ROLR event did occur at the 11th hour enabling the NECF ROLR provisions to be adopted, then all NECF provisions should be adopted.

Essentially if the Victorian ROLR is recovering the Victorian one-off fee from ROLR customers then there should be no ability to recover further costs under NECF such that some customers pay twice. 

In the Victorian ROLR framework, all electricity connection points in Victoria have a ROLR assigned, however the same cannot be said for all gas connection points, eg South Gippsland.  If a ROLR event were to occur in gas and if a local area retailer had been nominated under NECF for all gas extensions not on the declared transmission system, then adopting the ROLR provisions in NECF sooner may be beneficial for some customers.

The discussions above about which customer - ROLR contracts and cost recovery mechanism take no account of the NECF readiness capability of all stakeholders.

For NECF, AEMO need to develop ROLR procedures that cover both electricity and gas and cover a local area retailer and a 2nd tier retailer failure. Recently the CATS and B2B procedures have been revised to cater for an electricity ROLR event, these may meet the NECF requirements although they are procedures under the NER and not the NERR.  However, in gas, there may be a need for more significant ROLR procedures and systems development to cater for a local retailer failure.

AEMO are working through gas and electricity working groups developing the gap analysis and hence procedures and systems changes that may be required.  Until, it becomes clear when the NECF ROLR framework can be delivered by all stakeholders, it may be premature to legislate the ROLR customer contracts.

In order to manage a ROLR event under NECF, the AER needs to have implemented the register of authorised retailers and provided the list/areas/conditions for the default ROLR and registered ROLRs.

The Application Act should provide clarity that all ROLR provisions are managed under the Victorian regime or all provisions are managed under NECF.  Any legislating of the NECF ROLR contracts needs to be considered in relation to stakeholder readiness to move to the full NECF ROLR framework.