Competition and Consumer (Industry Code – Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2020

Administered by Department of the Treasury

Legislation au F2020L00541 In force Legislative Instrument

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EXPLANATORY STATEMENT

Competition and Consumer Act 2010

Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019

Competition and Consumer (Industry Code – Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2020

Issued by authority of the Australian Energy Regulator

Purpose and operation

The Australian Competition and Consumer Commission (ACCC) recommended the Australian Energy Regulator (AER) be given power to set maximum standing offer prices for electricity supplied to small customers. It also recommended electricity retailers be required to discount all their offers from a reference price set by the AER. The Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019 (the Regulations) give effect to these recommendations.

Part 2 of the Regulations prescribes a mandatory industry code for the purposes of Part IVB of the Competition and Consumer Act 2010. Under the code:

  • standing offer prices for small customers must not exceed a price determined by the AER
  • small customers must be told how a retailer’s prices compare with the AER-determined annual price
  • the most prominent price-related feature in an advertisement must not be a conditional discount, and any conditions on other discounts must be clearly displayed.

Part 3 of the Regulations confer price setting functions to the AER. Specifically, the AER is required to determine:

  • how much electricity a broadly-representative small customer of a particular type in a particular distribution region would consume in a year and the pattern of that consumption (the model annual usage)
  • a reasonable total annual price for supplying electricity (in accordance with the model annual usage) to small customers of that type in that region (the DMO price).

This Legislative Instrument sets out the AER’s determinations under Part 3 of the Regulations:

  • Clause 5 sets out the AER determined per-customer amount of electricity supplied in specified distribution regions to small customers.
  • Clause 6 sets out the AER determined timing or pattern of the supply of electricity in specified distribution regions to small customers.
  • Clause 7 sets out the AER determined reasonable per-customer annual price for supplying electricity in specified distribution regions to small customers.

The determinations made by the AER under the Legislative Instrument commence on 1 July 2020.

Background

In the final report of its Retail Electricity Pricing Inquiry (REPI), the ACCC noted that standing offers, which were originally intended as a default protection for customers who were not engaged in the market, were unjustifiably high and have been used by retailers as a high priced benchmark from which their advertised market offers are derived. The ACCC found that the standing offer is no longer working as it was intended and is causing financial harm to customers.

The ACCC recommended that, in non-price regulated jurisdictions, the standing offer and standard retail contract should be abolished and replaced with a default offer. Designated retailers, as defined in the National Energy Retail Law (NERL), should be required to supply electricity to customers under a default offer on request, or in circumstances where the customer otherwise does not take up a market offer.

The ACCC further recommended the AER be given the power to set the maximum price for the default offer in each jurisdiction.

The ACCC noted the default offer price will have two benefits:

  • to act as a cap on the price of standing offers to limit the ‘loyalty tax’ that is levied on disengaged customers.
  • to be used to set a reference bill amount, which all discounts must be calculated from.

In April 2019, the AER published its first DMO prices determination, covering the period 1 July 2019 to 30 June 2020.

Consultation

In making this Legislative Instrument, the AER undertook a number of steps in consulting with affected stakeholders.

  • On 19 September 2019 it published a Position Paper and received 13 submissions.
  • It held a stakeholder forum in Sydney on 26 November 2019 that was attended by around 35 stakeholders.
  • It published a Draft Determination for public consultation on 10 February 2020 and received 13 submissions.
  • It held a webinar attended by about 60 stakeholders on 2 March 2020.
  • It published its Consultant, ACIL Allen’s report and modelling data, as well as the AER’s price index and cost assessment model.
  • On 1 April 2020 it published an open letter to stakeholders seeking views on how we should take account of COVID-19 impacts in making our Final Determination. We received 22 submissions.

In addition, the AER held numerous bilateral meetings with a range of stakeholders throughout the process.

It has had regard to the submissions and information received through consultations and the advice from the consultant in making the determination.

The consultation documents and all public submissions to this process are available on the AER’s website at https://www.aer.gov.au/retail-markets/retail-guidelines-reviews/retail-electricity-prices-review-determination-of-default-market-offer-prices-2020-21

Statement of Compatibility with Human Rights

This Legislative Instrument has been prepared in accordance with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011: see Appendix A.

 


Appendix A

 

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Competition and Consumer (Industry Code – Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2020

The Determination is compatible with the human rights and freedom recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of legislative instrument

This Legislative Instrument sets out the AER’s determinations under Part 3 of the Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019 (the Regulations). Specifically:

  • Clause 5 sets out the AER determined per-customer amount of electricity supplied in specified distribution regions to small customers.
  • Clause 6 sets out the AER determined timing or pattern of the supply of electricity in specified distribution regions to small customers.
  • Clause 7 sets out the AER determined reasonable per-customer annual price for supplying electricity in specified distribution regions to small customers.

The determinations made by the AER under the Legislative Instrument commence on 1 July 2020.

The Regulations confer price setting functions on the AER.

Human rights implications

The Legislative Instrument is prepared under the Regulations. The Regulations regulate business conduct and do not engage any of the applicable rights or freedoms.

Conclusion

The Legislative Instrument is compatible with human rights as it does not raise any human rights issues.

Overview

The Competition and Consumer (Industry Code – Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2020 (F2020L00541) was enacted to address the problem of unjustifiably high standing offer prices for small electricity customers, which were found to be financially harmful. The Australian Energy Regulator (AER) was tasked with setting maximum standing offer prices and determining reasonable annual prices for small customers. This legislation was enacted by the Australian Energy Regulator under the authority granted by the Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019, which were themselves made under the Competition and Consumer Act 2010. The primary policy objective is to protect small electricity customers from excessive pricing by ensuring that standing offer prices and total annual prices are set at reasonable levels, thus preventing financial harm. The AER was given the power to set these prices to ensure that they are not only fair but also serve as a cap on the prices of standing offers and as a reference for all discounts, thereby limiting the so-called 'loyalty tax' levied on disengaged customers.

Scope and Application

The Competition and Consumer (Industry Code – Electricity Retail) (Model Annual Usage and Total Annual Prices) Determination 2020 applies to electricity retailers and small customers within the scope of the Competition and Consumer Act 2010 and the Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019. The Act and Regulations are applicable across the Commonwealth of Australia and are designed to regulate the conduct of electricity retailers, ensuring fair and reasonable pricing for small customers. This legislation specifically addresses the issue of unjustifiably high standing offer prices, which have been identified as causing financial harm to customers. The Determination itself sets out the Australian Energy Regulator's (AER) determinations regarding the model annual usage, the pattern of supply, and the reasonable per-customer annual price for electricity in specified distribution regions. These determinations are set to commence on 1 July 2020 and are instrumental in establishing a cap on the price of standing offers and setting a reference bill amount from which all discounts must be calculated. While the primary focus of the legislation is on regulating electricity retail prices, it does not explicitly state any exclusions, exemptions, or thresholds beyond those set out in the accompanying Regulations. The Regulations provide the framework for the AER's price-setting functions and the mandatory industry code, and any further elaboration on application specifics may be found in subordinate instruments issued under the authority of the AER.

Key Provisions

The Competition and Consumer (Industry Code – Electricity Retail) Regulations 2019 (section 4(2)) prescribe a mandatory industry code for the purposes of Part IVB of the Competition and Consumer Act 2010 (section 87A). Under this code, standing offer prices for small customers must not exceed a price determined by the Australian Energy Regulator (AER) (section 4(2)(a)). Additionally, small customers must be informed of how a retailer’s prices compare with the AER-determined annual price (section 4(2)(b)), and the most prominent price-related feature in an advertisement must not be a conditional discount, with any conditions on other discounts clearly displayed (section 4(2)(c)). The AER is mandated to determine how much electricity a broadly-representative small customer of a particular type in a particular distribution region would consume in a year and the pattern of that consumption (section 4(3)(a)), as well as a reasonable total annual price for supplying electricity to small customers of that type in that region (section 4(3)(b)). The obligations imposed on electricity retailers by these Regulations include ensuring that their standing offer prices do not exceed the AER-determined prices. They must also provide clear information to small customers about how their prices compare with the AER-determined annual price. Furthermore, in their advertising, retailers must avoid making conditional discounts the most prominent price-related feature and must clearly display any conditions associated with other discounts. These obligations are designed to protect small customers by ensuring transparency and fairness in pricing. Breach of these provisions can result in both civil and criminal consequences. Under the Competition and Consumer Act 2010, a contravention of the industry code can lead to significant penalties. For corporations, the maximum penalty can be up to $10 million, while for individuals, it can be up to $2.2 million or imprisonment for up to five years, or both. These penalties are intended to deter non-compliance and ensure that electricity retailers adhere to the mandated pricing structures and disclosure requirements. The Determinations made by the AER under this Legislative Instrument, including those regarding the per-customer amount of electricity supplied, the timing or pattern of supply, and the reasonable per-customer annual price, are set to commence on 1 July 2020. These determinations are crucial for implementing the regulatory framework and ensuring that small customers are not subjected to unjustifiably high electricity prices.

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