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Focus: Queensland retail energy reform

27 May 2014

In brief: The Queensland Government has introduced legislation to apply the National Energy Customer Framework to the sale of electricity and gas to retail customers in Queensland, and to replace regulated electricity prices with a price monitoring regime in south east Queensland. Partner Anna Collyer (view CV) and Senior Associate Damien Hughes report.

How does it affect you?

  • The National Energy Customer Framework (NECF) regulatory regime will apply to the sale and supply of electricity and gas to retail customers in Queensland. The target implementation date is not expressed in the legislation (it is a date to be fixed by proclamation), though the Queensland Government has previously signalled its intention to implement the NECF in 2014.1
  • Retailers in Queensland will need to have in place all applicable NECF-compliant retail contract offers and customer policies. Existing energy retailers will transition from the Queensland-based licensing regime to the national authorisation scheme administered by the Australian Energy Regulator (AER).
  • Importantly, the application of the NECF will be modified in Queensland to preserve existing protections for supply to regional customers and other Queensland-specific regulatory obligations (the NECF has also been modified in its application by each other participating jurisdiction).
  • As another significant reform, the proposed legislation will abolish regulated retail electricity prices in SE Queensland, to be replaced with a more light-handed price monitoring regime. Outside of SE Queensland, regulated retail prices will remain.

Background

The NECF establishes a regulatory regime governing the sale and supply of electricity and gas to retail customers by retailers and distributors. The NECF is comprised of the National Energy Retail Law, Rules and Regulations, each established under the National Energy Retail Law (South Australia) Act 2011 and adopted in each participating jurisdiction through application legislation, with scope for each jurisdiction to apply its own specific additional provisions. NSW, South Australia, Tasmania and the ACT have already adopted the NECF.2

The National Energy Retail Law (Queensland) Bill 2014 will adopt the NECF in Queensland, with certain Queensland-specific variations discussed below, replacing existing provisions under the Electricity Act 1994 (Qld) and Gas Supply Act 2003 (Qld) and other legislation.

The NECF does not directly regulate prices and charges for energy retail services. Queensland electricity prices are currently regulated under the Electricity Act and set by price determinations made by the Queensland Competition Authority (QCA). Queensland retail gas prices are not currently fixed by regulation but are subject to a reserve power of the Minister to fix charges where competition is not considered to be effective in the market.

The Queensland Government currently makes community service obligation (CSO) payments to regional electricity retailer Ergon Energy Queensland, to ensure Ergon is able to offer notified prices to its customers in remote areas under a standard retail contract. These CSO payments would give Ergon, and its subsidiaries, a competitive advantage against any competitors and, so as to nullify any such advantage, Ergon and its subsidiaries are currently prohibited from entering into most kinds of negotiated electricity retail contracts and are largely confined to retailing electricity to small customers within prescribed areas.3

The NECF in Queensland

The principal impacts of the implementation of the NECF in Queensland will be:

  • 'Small' customers will transition to the NECF standard retail contract – a default contract that applies where alternative terms and conditions have not been agreed. All residential customers and businesses consuming less than 100MW of electricity or 1 TJ of gas per annum will be classified as 'small'.4
  • Small customers on standard retail contracts will pay the retailer's standing offer price. For electricity customers outside SE Queensland, the standing offer price will be the regulated 'notified price' under the Electricity Act. For customers within SE Queensland, separate reforms linked to the introduction of the NECF will permit each retailer to determine its own standing offer price (these separate reforms are discussed below). Retail gas prices will continue to be fixed by sellers subject to the Minister's reserve power to fix prices where competition in the market is considered ineffective.5
  • Small customers on negotiated retail contracts will continue on those contractual terms as 'market retail contracts' under the NECF except to the extent those terms do not meet prescribed minimum standards set out in the NECF.
  • Small customers on standard connection contracts with an electricity distributor will have their contracts replaced with standard connection contracts under the NECF (for gas, there are no standard form connection contracts under the Gas Supply Act). Negotiated connection contracts for electricity and gas will remain on their existing terms.
  • Sellers of electricity that do not hold a retail authority but currently sell electricity to a premises under a special approval (for example, certain holders of generation authorities and entities that on-sell electricity to users of a premises), will be transitioned onto the NECF as 'exempt' sellers and will continue to be able to sell electricity to premises, subject to relevant AER guidelines.

Queensland-specific provisions

A number of modifications and transitional arrangements will apply to ensure that arrangements are appropriate for Queensland, in particular, in regional areas, including:

  • Electricity prices for retail services to small customers outside SE Queensland will be preserved as the notified prices under the NECF.
  • Regulated standard terms and tariffs will continue to be available to large customers in regional areas outside of SE Queensland, and Ergon and its subsidiaries will continue to be restricted from entering negotiated retail contracts.
  • There will be provision for specialised standard retail and connection contracts for card-operated meter customers (a type of pre-payment meter) and for regulations to prescribe model terms for standard connection contracts for card-operated meter premises.
  • Queensland will opt out of the small compensation claims regime in the NECF that would otherwise apply to distributors who provide connection services. Customers seeking compensation from distributors will have to seek recourse under other avenues, such as consumer law.
  • New enforcement regimes will apply to ensure that energy retailers continue to comply with their community service obligations and that electricity retailers pass on the benefits of Queensland's solar bonus scheme to qualifying customers. Currently, these matters are addressed as part of the retailers' statutorily deemed retail authority conditions.6 Once the NECF is implemented, the Queensland Government will no longer be able to suspend or take other action with respect to retail authorities because these will be administered by the AER. Amendments to the Gas Supply Act and Electricity Act will effectively preserve the current arrangements, by giving the Minister a broad discretion to decide the terms of a community services agreement, where the Government and the retailer cannot agree themselves.
  • The Maranoa and Western Downs regional councils, who sell gas to customers within their constituencies, will be exempt from the national scheme and their conditions will be set out in regulations based on their existing requirements.

Removal of regulated electricity pricing in SE Queensland

The Electricity Competition and Protection Legislation Amendment Bill 2014 will remove retail electricity pricing regulation in SE Queensland and replace it with a 'price monitoring' regime. At present, the QCA is required to set the prices (called 'notified prices') that a retailer may charge its non-market customers. The amendments only relate to SE Queensland (being the area serviced by network distributor Energex Corporation Limited). Non-market customers include large and small customers who are on a standard (as opposed to negotiated) retail contract.

While absent from the legislation, the Queensland Government has indicated its policy position is that it will not implement the removal of price regulation unless it is satisfied that certain preconditions have been met, namely:

  • ensuring sufficient competition in the SE Queensland market (relevant will be the outcome of the AEMC's report on retail markets due in September 2014);
  • implementation of appropriate customer support mechanisms (the proposed implementation of the NECF will be considered relevant in this regard);
  • improving customer engagement;
  • establishing an effective regulatory framework; and
  • ensuring a viable methodology to determine regulated retail electricity prices in regional Queensland (as these are generally based on regulated prices in SE Queensland).7

New price monitoring provisions

The new market monitoring provisions will provide the relevant Minister with the power to direct the QCA to monitor and report on the operation of the retail electricity market in SE Queensland. This will include reporting on a comparison of the standing offer and market offer prices available to customers in that region, information about any trends in relation to variations to retailers' standing offer prices and market offer prices and other relevant information the Minister requires. The QCA's report must be published on its website.

The Minister may also direct an 'appropriate entity' (which could be the QCA or another entity which is considered appropriate) to conduct a review into the effectiveness of competition in the retail electricity market in SE Queensland and advise as to whether the Minister should keep, remove or reintroduce price controls.8

Significantly, the Minister will retain a reserve power to re-introduce price regulation. However, this power can only be exercised where specified criteria are met: where there has been a review into the effectiveness of competition in the market – either by the AEMC or an appropriate entity nominated by the Minister – and that review considers competition is not effective and gives advice recommending the reintroduction of price controls in the relevant market.9

Transitional provisions

A number of Queensland-specific provisions in the NECF will aim to soften the transition to unregulated electricity prices in SE Queensland:

  • for the first two years after the commencement of the legislation in Queensland, retailers will be prevented from applying new charges and fees that were not included in their price determinations applying immediately prior to the commencement (the price determinations will cease to apply once the legislation takes effect). A retailer may only include charges in its standing offer prices that are of a type included in the (previously applying) price determination. However, the retailer may determine the prices for the types of charges that were included in the price determination;
  • retailers must set their standing offer prices immediately after the price determination ceases to apply (ie once the legislation becomes effective) and cannot increase that price for one year; and
  • going forward, affected customers must be given advance notice of increases to standing offer prices before the increase takes effect.

What's next

The proposed legislation is currently before Parliament. Though its commencement date is presently uncertain, energy retailers and distributors will need to review their readiness for transition to the new regime. National retailers who are already operating under NECF in other jurisdictions will have to consider the implications of the Queensland specific arrangements. Existing and aspiring electricity retailers in SE Queensland will also need to assess the impact of the proposed price de-regulation, including the proposed price monitoring arrangements, and whether this will present new opportunities or challenges in the competitive market.

Footnotes
  1. Refer Discussion Paper, The 30 Year Electricity Strategy – Powering Queensland's Future.
  2. Western Australia and the Northern Territory are not participating jurisdictions under the existing National Electricity Market framework and as such are unlikely to adopt the NECF package.
  3. Electricity Act 1994, s55G.
  4. National Energy Regulations, s7.
  5. Gas Supply Act 2003, s228.
  6. Electricity Act 1994, s55DA; Gas Supply Act 2003, s175A.
  7. Hon. MF McArdle (Minister for Energy and Water Supply) speech transcript 20 May 2014.
  8. Electricity Competition and Protection Legislation Amendment Bill 2014, clause 45.
  9. Ibid, clause 50.

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