On 23 October 2014 the Australian Energy Market Commission (AEMC) made a final rule to improve the information given to consumers when entering retail energy contracts. Improved information enables consumers to engage more confidently in retail energy markets and make decisions that they consider better meet their needs. This in turn is likely to enhance competition in retail energy markets.

The Commission’s more preferable final rule enhances existing consumer protections under the National Energy Retail Law and the National Energy Retail Rules (retail rules). These protections require retailers to inform consumers on contract entry of key aspects of their contract and how they may vary over the duration of the contract. As has always been the case, retailers are required to comply with the terms and conditions of their contracts.  This will remain unchanged under the AEMC's final rule.

The figure below shows how the final rule will operate to enhance the existing disclosure requirements.
 

Figure 1: Changes under the Commission’s more prefereable final rule

This final rule will apply from 1 May 2015 to all new electricity and gas market retail contracts in South Australia, New South Wales, the Australian Capital Territory, and Tasmania. These are the jurisdictions where the retail rules currently apply. 

The Commission’s final determination was informed by research into consumer understanding, experiences and preferences in relation to price changes in their energy contracts. A copy of this research is available below.

Background to the rule change request and the powers of the AEMC

The Commission’s final rule was made in response to a rule change request submitted by two Victorian consumer groups, the Consumer Action Law Centre (CALC) and the Consumer Utilities Advocacy Centre (CUAC). Their request sought to prohibit retailers in jurisdictions where the retail rules apply from changing their prices during market retail contracts that have a defined period of time or a benefit that is offered for a specific period. These are known as “fixed term” and “fixed benefit period” contracts.

The AEMC considered this rule change request in its role as the rule maker for the Australian retail energy markets. The AEMC cannot make or amend a retail rule if it is not satisfied that two tests have been met. These tests are:

• that the new rule will or is likely to promote the long-term interests of consumers as required under the National Energy Retail Objective; and
• where relevant, that the new rule is compatible with the application and development of consumer protections for small customers, including hardship customers.

When the AEMC is considering a particular rule that has been proposed, it can decide to make the rule as proposed, make a more preferable rule, or no rule at all if it considers that doing so would better serve the long-term interests of consumers.

As noted above, the Commission has made a more preferable final rule and published a final determination providing its reasons.

Regulatory requirements for price variations in retail energy contracts

There are two kinds of retail energy contracts, market retail contracts and standard retail contracts. The terms and conditions of standard retail contracts are largely set out in the retail rules. The retail rules contain a minimum set of standards for market retail contracts and retailers build on these to compete for customers.

The minimum standards that apply to market retail contracts do not regulate how often or by how much retailers can change their prices. However, retailers are required to notify consumers of any price changes as soon as practical to do so or at the latest in the consumer’s next bill. There are also obligations on retailers to disclose key information to consumers at the point of entry into a market retail contract.

The Commission’s consideration of the rule change request

CALC and CUAC consider that a retailer’s ability to change a consumer’s price shifts the risk of cost increases from retailers to consumers. They also consider that this negatively affects consumer participation in retail energy markets. CALC and CUAC submitted their rule change request to address these issues.

The Commission considers that their proposed rule could have resulted in increased prices and reduced choice for consumers.  Retailers manage a range of costs on behalf of consumers. About 60 per cent of the costs that make up a retail energy bill are determined by processes external from individual retailers. If retailers were unable to change their prices to pass on unmanageable changes in their costs when they occur, prices would have been likely to increase.

If retailers were unable to change their prices they may also have reduced the length of contracts or stopped offering some types of contracts. This could have reduced the choice of contracts available to consumers and the effectiveness of retail competition.

Some retailers already offer contracts where the price cannot change. These fixed price contracts are generally more expensive, but allow consumers that prefer price certainty to choose a contract that they consider better meets their needs.

Consumers should have the ability to choose an energy contract that they consider best meets their needs, so long as they have enough information to make an informed decision. Consistent with this approach the Commission’s final rule requires retailers to improve the information they provide consumers to promote consumer engagement and competition.

The Commission also notes that the Australian Energy Regulator has a role in regulating how retailers market offers and prices to consumers. Improvements in these regulatory requirements could work alongside the Commission’s final rule to assist consumers to make more informed decisions when selecting an energy contract.