Australia – New Pricing Rules For Electricity Retailers.

6 August, 2019

 

On 1 July 2019, the Electricity Retail Code came into force in New South Wales, South-Eastern Queensland and South Australia introducing a new Default Market Offer ("DMO") for electricity customers.  At the same time, Victoria introduced its own Victorian Default Offer ("VDO") for electricity customers together with Deemed Best Offer, Clear Advice Entitlement and GST Inclusive Pricing rules for energy retailers.

 

WHAT YOU NEED TO KNOW – KEY TAKEAWAYS

The DMO and VDO requires retailers to offer customers a "default offer" that does not exceed a regulated price. The price is set annually by the Australian Energy Regulator ("AER") (outside Victoria) and Essential Services Commission ("ESC") (in Victoria). Retailers may continue to offer other "market offers", but must comply with new advertising rules, including obligations to frame prices and discounts by reference to the regulated prices, designed to make it easier to compare prices between retailers. The VDO requires Victorian retailers to set a much lower price than the DMO, raising concerns about whether there will still be scope for price competition. The Chair of the Australian Competition and Consumer Commission ("ACCC") commented that "[we] are concerned about what will happen in Victoria. The VDO is at a level so low that everyone might flock to that and say, 'why bother' [to seek a market offer]". Victorian retailers must also comply with a range of other rules which, in effect, require retailers to provide information about the cheapest generally available offer to the customer, provide greater disclosure about costs, and communicate all prices on a GST-inclusive basis.

Since the ACCC published Restoring electricity affordability and Australia's competitive advantage following its Retail Electricity Pricing Inquiry in June 2018 (see our summary), there has been significant debate about how to increase retail competition by making energy pricing and discounts easier to understand.  In particular, the ACCC was concerned that price dispersion between the best and worst offers, and confusing discounting practices, were problematic.

 

Part of the price dispersion was driven by the fact that energy regulations in the National Electricity Market required retailers to make a "standing offer" available to customers.  The standing offer is the offer that, in effect, applies when a customer is not engaged with the electricity market.  A practice developed over time in which many retailers used the standing offer as, in effect, a benchmark from which to advertise discounts.  Consequently, the standing offers of retailers have generally become the most expensive way to buy electricity.  While customers can negotiate better details, the ACCC found that some customers, either through choice or, perhaps, due to the complexity in switching or choosing the right offer, did not take that option.

 

The Electricity Retail Code, which is an industry code under the Competition and Consumer Act 2010 (Cth), is intended to address this by introducing a new, lower, DMO to replace the standing offer.  The DMO is calculated by the AER as an annual total reference price.  Electricity retailers must make a default offer available that is equal to, or less than, the DMO reference price for residential customers with flat or controlled load tariffs, and small business customers with flat tariffs, in New South Wales, South-Eastern Queensland and South Australia.

 

The Electricity Retail Code also introduces rules that apply when advertising or publishing electricity prices, and offering to supply electricity, as well as advertising rules for any conditional discounts (e.g. discounts that only apply when a person pays on time). 

 

These rules are intended to facilitate comparisons between retailers, by requiring price claims to be expressed by reference to the DMO reference price.

 

Victoria has also introduced a series of new rules, including a default offer regime, through a combination of changes to the Victorian Energy Retail Code, and amendments to the Electricity Industry Act 2000 (Vic) and Orders in Council made under that legislation.

 

The Victorian regime also features a regulated price, set by the ESC.  Unlike the DMO, the VDO reference price is expressed as a tariff rather than a reference bill.  Electricity retailers must offer a Victorian default offer, replacing the standing offer, that is equal to or less than the VDO reference price.  When advertising discounts, they must express those discounts against the VDO reference price, and disclose how the discount was calculated.

 

In addition, energy retailers in Victoria must comply with a significant range of new obligations designed to give small customers an entitlement to clear, timely and reliable information to assist the customer to assess the suitability of, and select, a customer retail contract, and to identify whether they are on their retailer's Deemed Best Offer.  These strict new obligations include:

 

• providing customers with information, on their bills, regarding the cheapest generally available offer from the retailer;
• informing customers of the terms affecting the potential costs payable by the customer, prior to obtaining a small customer's explicit informed consent to enter a customer retail contract; and
• requiring retailers to express prices as inclusive of GST (where applicable) in communications to customers, including all advertisements and bills. 

 

The Victorian VDO reference price has been set at a lower level than the DMO reference price.  This has raised concerns that it is so low that retail competition may be stifled, as customers decide the benefits of having to negotiate a deal are not worth it.  In addition, under both regimes, the reduction in price dispersion necessarily means less scope for price competition.  It will remain to be seen whether it will result in lower prices overall.

 

The reforms represent a significant intervention in electricity markets.  There is now a live experiment in electricity markets.  The pricing outcomes and customer movements under the Electricity Retail Code, and stricter Victorian regime, will be closely analysed and contrasted over the coming year.

 

With thanks to Dean Armstrong of Ashurst for his contribution 

 

For further information, please contact:

 

Justin Jones, Partner, Ashurst

justin.jones@ashurst.com