When is an electricity discount not a discount?

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The key driver of rising electricity bills in Australia has been network costs.[1] Accordingly, a range of measures have been introduced in an attempt to keep network costs down (for example, the review of the allowable rate of return.[2]  However, another driver of electricity price rise has been increases in retailer margins.[3] One thing that may be leading customers to pay more than they ought to to retailers is a general lack of pricing transparency. The lack of rules around how discounts are offered means that, often, a customer may receive a ‘discounted’ price that is lower than the ‘full’ price for an equivalent offer with another retailer.  In order to rectify this, the Australian Energy Market Commission (AEMC), on the request of the Commonwealth Government, has introduced a rule change prohibiting discounting under certain circumstances.[4] We summarise the new rule below and look at what impact this might have on retailers.

electricity discount

Photo by Anthony Indraus on Unsplash

By Dr Drew Donnelly, Regulatory Specialist, Compliance Quarter 

The Discount Prohibition Rule

The new rule aims to make discounting more transparent by setting a clear benchmark against which a discount can be offered. The goal is that customers will only receive a discount where they are genuinely paying less than they otherwise would.  The new rule assesses the permissibility of a market contract discount against a benchmark of the regulated ‘standing offer’.

The prohibition rule only prohibits discounts where a relatively complicated set of conditions are met. Those conditions are set out below:[5]

A. Energy Rates. At least one energy rate must exceed the equivalent energy rate component under the equivalent standing offer and no energy rate under the market retail contract is lower than the equivalent energy rate component under the equivalent standing offer.

B. Energy Payments. The level or rate of every energy payment to the customer, such as feed-in tariffs, must be equal to or lower than the level or rate of the equivalent energy payment under the equivalent standing offer.

C. Equivalency. The discounting prohibition applies only to a market retail contract that has an equivalent standing offer. A standing offer is equivalent to a market retail contract if:
–   both are provided by the same retailer;
–   the tariff structures are not materially different with respect to energy rates and energy payments;
–   the market retail contract does not provide material additional benefits or services to the customer compared to the standing offer;
–   they are both available to the same customer, or would be, if the retailer were the designated retailer for the customer’s premises.

One consequence of these exceptions is that market contracts with all energy rates fixed for 12 months or more will be exempt from the discount prohibition as these will not be considered to have an “equivalent standing offer”.

The final rule for the discount prohibition takes effect on 1 July 2018 and will not apply in Victoria (as it is not yet subject to the National Energy Retail Law or Rules).

In addition, AEMC, jointly with the Australian Energy Regulator has recommended to the Council of Australian Governments (COAG) Energy Council that it make the presentation of market and standing offer prices subject to a civil penalty under the National Energy Retail Law.

Comment

Retailers may attempt to adhere to the discount prohibition, while at the same time trying to preserve their margin as much as possible. That is, retailers will attempt to fall outside the conditions that trigger the discount prohibition.  We have seen this before when the prohibition on late penalty fees mean that retailers responded by offering discounts from inflated rates. As there is no set price for standing offers (outside states with pricing regulation), retailers may attempt to preserve their margin by increasing their standing offer price from which discounts are benchmarked.[6] Whichever way a retailer responds, it must take heed of general Australian Consumer Law including prohibitions on misleading or deceptive conduct (and the fact that regulators may be keeping an eye on such conduct).

For further information and to contact Compliance Quarter, click here.

 

[1] See ACCC Retail Electricity Pricing Inquiry: Preliminary report, 22 September 2017, p6.

[2] https://www.compliancequarter.com.au/feedback-sought-rate-return-methodology-network-businesses/.

[3] ACCC Retail Electricity Pricing Inquiry: Preliminary report, 22 September 2017, p6.

[4] See https://www.aemc.gov.au/news-centre/media-releases/putting-stop-energy-discounting-leaves-consumers-worse.

[5] For more information see the final rule determination at https://www.aemc.gov.au/sites/default/files/2018-05/Final%20determination_1.pdf, p10.

[6] See The Australia Institute’s (TAI) briefing note for further information on such possibilities http://www.tai.org.au/sites/defualt/files/P529%20briefing%20note%20retail%20energy%20discounts%20Final%20draft%202.3.pdf, p10.

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