AER Draft Determination of default market offer prices

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The Australian Energy Regulator (AER) has published its draft determination of default market offer prices. Below we look at the methodology used and the implication for energy sellers.

By Connor James, Compliance Quarter. 

The default market offer (DMO) came about as a result of recommendations from the Australian Competition and Consumer Commission (ACCC) in its retail electricity price inquiry (REPI). On 23 February 2019, the AER published draft default market offer prices, which are to apply from 1 July 2019 for standing offer customers on relevant tariffs, in network distribution regions not subject to state-based price regulation.

Price Reductions

As has been widely reported, in a number of regions the DMO will result in a decrease in the rate being paid by consumers on standing offers. The DMO is said to result in “reductions in median standing offer prices in all distribution zones” of up to $218 for residential customers on flat-rate tariffs. The DMO will apply in those states that have adopted the National Energy Customer Framework (NECF) which are NSW, QLD, SA, TAS and the ACT (subject to jurisdictional regulations). Victoria, despite a recommendation from the ACCC, continues to refuse to adopt NECF and have developed their own default pricing regime.

As you will see from the above, the determination relates to flat rate and flat rate with controlled load but not directly to time of use tariffs. On this, the AER notes:

While the draft Code does not require us to develop DMO prices for Time of Use offers, retailers will need to be able to calculate annual bills for TOU offers for comparison to the reference bill. For consistency, these calculations will need to be made using a common set of assumptions about usage at different times.

The AER’s calculation for its draft determination position is that “the DMO price for each distribution zone will be set at the mid-point (50th percentile) of the range between the median market offer and median standing offer, based on generally available offers in October 2018.”

Impact on energy sellers

The DMO is effectively price regulation. Under the draft Code retailers must structure prices to not exceed the DMO annual price for the stated benchmark consumption level. From a retailer’s perspective, this will involve system and process changes and, for many with legacy systems, significant implementation and ongoing compliance costs.

The changes may also have impacts on exempt energy sellers who are generally prohibited from charging more than a local area retailer’s standing offer.

Changes to the rules and law will be required to give effect to the DMO.

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