Question: What do you consider to be a reasonable maximum term for a contract with an embedded network provider? How often should it come up for review?
Answer: If you’re having infrastructure installed, and infrastructure is being provided to you by your embedded network operator, then I would recommend a 10 year term.
It’s a really good question, and the answer is straightforward.
If you’re just appointing a provider to provide the retail services, like billing services and risk management services on your behalf, I would always recommend you go with a three year term minimum. The reason for that is, that provider needs to put out to contract your electricity load. The best way to get good pricing on the electricity load is to have a longer term contract. If you take a short term contract, you’re more likely to get a higher price contract. Three years is the sweet spot.
If you’re having infrastructure installed, and infrastructure is being provided to you by your embedded network operator, then I would recommend a 10 year term. The reason we recommend the 10 year term is that’s the sweet spot by which you can install that infrastructure, recover the cost through the supply of services as opposed to a discrete fee, and not see a step up in the price that customers are expected to pay. Because obviously, that’s just a question of amortisation – over how long do we spread the investment that we’ve made to recover it? The longer it is, the lower the cost per unit, essentially a cost per kilowatt hour. So we normally recommend a 10 year term where there’s infrastructure involved, and actually that can vary depending on how much capex has been deployed at the site.
How often would it come up for review? Every business will do this differently. The way we do this is that we have termination for convenience. Our view is our services should be good enough that our clients aren’t locked into a contract where they can’t leave if they want to. So all of our contract clauses have termination for convenience. We do ask that if we deploy capital, that we’re able to recover that capital, so you have to buy out the asset, but we do it on a flat linear depreciation basis. It’s always at a cost. If we spend $100,000, the contract will say ‘If you terminate in year 1, you have to give us $100,000, back. If you terminate in year 2, it’s $90,000, $80,000, $70,000 and so on. It’s just a simple, flat linear.
The question of review, is really review it whatever time you feel is appropriate for your organisation. Typically, that’s if something’s going wrong and you’re not happy or someone’s offering you something else that you think is worth consideration. It shouldn’t be relevant that you have periodic reviews fixed in, in the contract because you should always have the ability to select a new supplier and have the freedom to choose if you want. That is different for each provider. If you’re negotiating a contract with a provider, you should insist on this because there are providers out there that are offering that. So if your current provider isn’t offering this and the fact that others are, they may consider changing their position.
Drew McKillican
Altogether Group
E: DMcKillican@altogethergroup.com.au
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