New rules for clearer energy contracts
23 October 2014
The Australian Energy Market Commission (AEMC) has made a final rule requiring retail companies to improve the information they give to consumers when they enter an energy contract.
AEMC Chairman, John Pierce, said consumers would be able to shop more confidently for electricity and gas deals if they had access to clearer information on energy contract options. The new rule clarifies that energy retailers must tell consumers more clearly if prices can change during their retail contracts and provide clear product disclosure details on when they will notify customers about price changes.
The new rule was made in response to a rule change request submitted by Victorian consumer groups, the Consumer Action Law Centre and the Consumer Utilities Advocacy Centre. Their request sought to require retailers to fix their prices for energy contracts that have a defined period of time or a benefit, such as a discount from a retailer’s standard energy rates, that is offered for a specific period.
“We have carefully considered this rule change request and conducted extensive market research into consumers’ experiences of price changes and their preferences for fixed price and variable price contracts,” Mr Pierce said.
Research that informed the final rule indicated that some consumers may be entering contracts unaware that prices may change during the term of some types of contracts. The research also indicated that people want a range of contract and price options to meet the specific needs of their household or business – with both fixed and variable prices to choose from.
“The survey results showed a mix of preferences with almost half of residential (45 per cent) and small business (47 per cent) consumers preferring a variable price while a third (31 per cent) of residential consumers and a quarter (25 per cent) of small business consumers prefer a fixed rate,” Mr Pierce said.
Both fixed and variable price contract options currently exist for consumers to choose from. The Commission’s final rule preserves the ability of consumers to choose from these options.
“Our consultation highlighted some confusion in the debate around whether energy retailers are required to comply with the terms of their contracts. This was not the issue at the heart of the rule change request. As has always been the case, retailers are required to comply with the terms and conditions of their contracts and this will be unchanged under our final rule. Contracts are enforceable by law and consumers can and should take action against companies that breach their contracts.”
The AEMC has also supported a proposal by the Australian Energy Regulator to review the effectiveness of their energy price comparator website, Energy Made Easy, and its guidelines on how retailers market their energy offers to consumers.
“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 the competitive process in retail energy markets,” Mr Pierce said.
Previous AEMC analysis has shown that consumers can save between five and sixteen per cent on their annual electricity bill by shopping around for the best deal and switching away from regulated standing offer contracts.
The new rule will apply to all new market contracts in South Australia, Tasmania, New South Wales and the Australian Capital Territory from 1 May 2015.
Other key points
The research undertaken for the AEMC showed consumers are primarily concerned about broad energy education issues such as; ensuring consumers are better informed about energy contract options; providing easier ways to compare different energy options; and wider promotion of independent price comparison websites like the Australian Energy Regulator’s Energy Made Easy website.
The research suggests that many consumers did not know the type of energy contract they were currently on. Just over half of residential consumers and small business consumers surveyed said they recalled previously signing up for a contract for a specific period of time, such as a one, two or three year contract.
Where a surveyed consumer had noticed their prices had changed, around a third of residential and small business consumers said they did nothing and paid their account; and less than 10 per cent changed their energy company.
The research indicated that there are differences in consumers’ understanding of energy contracts. Some residential consumers expected that the rate they would pay per unit of energy would not change. Other residential consumers and many small business owners were more likely to expect that it is not realistic for energy companies to fix their prices.
Under the current rules, there are no regulatory limitations on how often and by how much retailers can change their prices during market retail contracts that have a defined period of time or a benefit that is offered for a specific period. However, some retailers may choose to set out obligations in their contracts in relation to when or by how much they will change their prices in response to consumer preferences for these services. If this occurs, retailers must comply with the terms of their contracts.
The final rule enhances existing consumer protections under the National Energy Retail Law and the retail rules. It applies to 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.
About the Research
To inform the Retailer Price Variations in Market Retail Contracts Draft Determination, Newgate Research conducted focus groups with 162 participants and a survey of 2,213 residential and small business consumers across NSW, ACT, SA, VIC, and Queensland. To access the full report go to www.aemc.gov.au.
For more information
AEMC Chairman, John Pierce (02) 8296 7800
Media: Prudence Anderson, Communication Manager (0404) 821 935 or (02) 8296 7817
About the AEMC
The Australian Energy Market Commission is the independent body responsible since 2005 for providing policy advice to Australian governments on the electricity and gas sector. It makes energy market rules which are applied and enforced by the Australian Energy Regulator.