The Freedom to Choose? Negotiating Energy Supply Contracts

16.01.03 Share

 

The energy supply markets have been open to competition for quite some time. Larger industrial and commercial (I&C) customers have been able to exercise their right to choose their own electricity and gas suppliers since 1994, and all customers since 1999. Much of the rhetoric about the introduction of competition has hailed it a great success, allowing customers freedom of choice, providing lower prices and offering better services.

But apparently not all is going to plan. Ofgem's recent consultation paper "Transfer objections: stronger rights for industrial and commercial customers" issued in December 2002 points out that the objection arrangements governing the change of supplier process, as contained in industry licences or agreements, are hindering I&C customers' rights to change energy supplier, and proposes changes to rectify the problem. The consultation document seeks views by 14 February 2003 with Ofgem hoping to implement the changes, by modifying the relevant industry documents, by summer 2003.

If implemented, the changes will mean that the terms and conditions of I&C supply contracts will play a more significant role in allowing, or restricting, the freedom of I&C customers to change supplier.

Background

The change of supplier rules and the circumstances in which transfers can be prevented differ in gas and electricity.

In accordance with its licence, a gas supplier can prevent a customer (whether I&C or domestic) from moving to another supplier if either the customer is in debt to it or has a current and valid contract with it. Where such a customer arranges to be supplied by another supplier, that supplier will need to register to become the customer's new supplier. The existing supplier can use the industry procedures to raise an objection to the new supplier's registration. Unless the objection is retracted, the existing supplier remains the registered supplier and the customer is effectively prevented from changing supplier.

In electricity the Master Registration Agreement (MRA) sets out the change of supplier rules and procedures and states that objections to registrations of I&C customers can only be made in two circumstances; (a) where both suppliers agree that the registration was made in error; and (b) where the registration did not include all the required information.

In neither market is the operator of the relevant registration system under any obligation to check that an objection notice complies with the rules. Consequently it is possible for the objection facility to be used inappropriately. For an example see Renewable Energy Company Ltd v Thames Water Utilities (30 March 2001) in which Ofgem intervened.

Ofgem's Proposals

Following representations about the differing provisions in each industry and concern about their operation, Ofgem has conducted consultations on the rights of suppliers to object to the transfer of I&C customers. Whilst the consultations have highlighted differing views on the need for a right to object to a transfer, there is general agreement that the rules and procedures should be harmonised in the gas and electricity sectors. This desire for harmonisation is the driving force behind the current proposals.

Various parties have suggested that the gas provisions allowing suppliers to block I&C customer transfers are open to abuse and are inconsistent with other markets. However, others argue that I&C gas supply contract terms take account of seasonal variations, and removing the transfer blocking provisions, thereby enabling customers to move mid-contract, would inevitably lead to higher prices or even hefty termination fees.

Conversely in electricity it has been suggested that prices could be lowered if some of the risks of the New Electricity Trading Arrangements could be mitigated by allowing I&C customer transfers to be blocked on contractual grounds. There is also some consensus that it would be helpful if transfers that have been made in error could, where the customer so requests, be prevented from proceeding by the use of the objection facility. Although the facility can be used if both suppliers agree, it is not always possible for suppliers to do so within the short timescales for raising objections.

Ofgem has considered all these points and outlines a number of options open to it. These range from leaving things as they are, to changing the rules in one sector only to full alignment of the rules.

Ofgem's preferred position is that the energy supply contract should determine the relationship between the I&C customer and the supplier (whether gas, electricity or dual fuel). The contract, rather than industry documents, should specify the circumstances in which the supplier can use the objection procedure. In Ofgem's view these are matters which are best left to negotiation between the parties rather than to regulation.

Issues

Notwithstanding its desire for contractual terms to govern the relationship between suppliers and I&C customers, Ofgem is not proposing to withdraw the objection procedure for I&C customers. On the contrary, suppliers will be able to take advantage of the facility in many more circumstances than at present, provided their supply contracts entitle them to do so. Various parties have raised concerns about the ability of suppliers to include their own grounds of objection in contracts and the possibility that this could lead to lack of transparency for other suppliers and could be open to abuse.

Ofgem's view is that I&C customers are more sophisticated than their domestic counterparts and do not need the same level of regulatory protection. Although this may be true of the large commercial companies who can utilise legal expertise quickly and efficiently it may not be the same for those smaller I&C customers who may not have the same bargaining power or the same resources or experience to enter into detailed negotiations on the terms of their supply contracts.

One of the key impacts of the proposed changes not mentioned by Ofgem relates to the remedies open to I&C customers who wish to challenge what they might consider to be invalid objections.

At present where a supplier raises an objection, which is not subsequently retracted, a customer's transfer to his chosen supplier is prevented. The terms of the supply are immaterial. If the objection is made in accordance with industry rules the customer is unable to argue that the objection is invalid . If the objection is not made in accordance with the industry rules the customer, or his potential new supplier, is able to complain about the supplier's actions to the appropriate governing body. In gas the complaint would be to Ofgem (as the body responsible for investigating potential breaches of licence). In electricity the complaint would, in the first instance, be to Master Registration Agreement Service Company (MRASCO) (the company responsible for the operation of the MRA) on the basis that the existing supplier was in breach of that agreement. Persistent or major breaches could result in Ofgem imposing monetary fines on the supplier or even (in extreme cases) lead to the supplier's licence being revoked.

Under the proposed changes it is likely that most, if not all, suppliers will include provisions in their I&C contracts enabling them to prevent a customer from switching to another supplier in identified circumstances. The industry procedures will allow a supplier to object to an I&C customer transfer if the supply contract so allows and/or the existing and new supplier agree. As now the provider of the registration system will not be under any obligation to ensure that the objection is valid. Even if it were under such an obligation it is difficult to see how it could fulfil it given that it will not have access to the supply contract.

Under these circumstances where a supplier raises an objection and thereby prevents a customer from moving, the only remedy available to the customer is to challenge the supplier's contractual rights. The regulatory protection and corresponding risk to suppliers of fines and/or licence revocation will no longer be available. Whether the right to object has been correctly exercised under the contract would ultimately be a matter for courts to decide.

If an amicable solution is not reached, the customer would need to bring a claim for breach of contract against the objecting supplier and if successful obtain a court injunction to prevent the supplier from making a further objection and/or damages. Therefore contractual disputes between suppliers and customers and possibly between suppliers could increase.

Whether Ofgem's recommendation is the most appropriate way forward and whether it achieves the stated objective of giving stronger rights to customers remains to be seen. However what is clear is that to minimise the potential for dispute, parties to a supply contract will need to give careful and thorough consideration to the terms and conditions of those supply contracts.

Key Contact

Derek Goodban, partner, +44 (0)121 685 2710, derek_goodban@wragge.com

This alert may contain information of general interest about current legal issues, but does not give legal advice.

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