Guideline: maximum cap for pay-on-time discounts

1. Purpose of this guideline

1.1. The purpose of this guideline is to provide information to energy retailers and other interested parties on the cap that applies to pay-on-time discounts offered as part of any market retail contract entered into on or after 1 July 2020.

1.2. This guideline is made under section 13 of the Essential Services Commission Act 2001.

2. What is the pay-on-time discount cap?

2.1. A pay-on-time discount is a discount that is conditional upon the customer paying a bill on or before the pay-by date.

2.2. Under clause 95(1) of the Energy Retail Code of Practice, any pay-on-time discount in a market retail contract is capped at the amount specified in a guideline published by Essential Services Commission (the commission).

2.2. The commission determines on an annual basis the maximum discount that a retailer is permitted to offer to customers as a condition of paying on time and specifies that cap in this guideline.

2.3. The pay-on-time discount cap was introduced to ensure conditional discounts are cost-reflective and to limit the penalties faced by small customers who fail to meet offer conditions, in line with recommendation 4E of the Independent Review of the Electricity and Gas Retail Markets in Victoria.^[1]

3. How the cap is set

3.1. The methodology used to calculate the pay-on-time discount cap is the sum of:

• the 10-year Australian Commonwealth Government Bond Rate using a 40-day trailing average (a proxy for the risk-free rate)
• a debt risk premium derived based on the difference between the yield on 10-year BBB-corporate bonds and the risk-free rate
• an allowance for debt raising costs based on information from Treasury Corporation of Victoria.

3.2. This figure is the maximum percentage discount a retailer could apply to a customer’s bill that would be conditional on the customer paying that bill on or before the pay-by date.

4. How the cap is updated

4.1. The commission updates the pay-on-time discount cap annually. The commission uses data as of 31 March to determine the level of the cap that will take effect from 1 July for the financial year.

4.2. The commission updates this guideline by May each year and publishes the updated guideline on the commission’s website.

5. Current cap

The maximum pay-on-time discount cap applicable to any market retail contract entered into from 1 July 2022 to 30 June 2023 is 5.71 per cent.

6. Rate cap change to apply from 1 July 2023

The new pay-on-time discount cap applicable to any market retail contract entered into from 1 July 2023 to 30 June 2024 is 7.16 per cent.