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Energy retailer “switching” driving prices up, not down, says regulator

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The head of Victoria’s Essential Services Commission has warned that the government-backed push for increased competition in Australia’s retail electricity market is having the opposite effect to what was intended, and further driving up the cost of power for Australian consumers.

In a presentation to Australian Energy Week, ECS chair Ron Ben-David described a retail energy price paradox in the market that meant the more electricity customers “switched” retailers, the bigger the retail component of power bills became.

And that’s because the cost of competition – customer acquisition retention, marketing, advertising, commissions to sales agents, commissions to switching sites – increases for retailers, and is passed on to consumers through their bills.

But it’s also because of the notoriously murky pricing structure behind the retail component of electricity bills, which – as Giles Parkinson described it last August – is a “merry-go-round of money” that the consumer is never invited to ride.

And it’s not exclusive to the retail component of the bill. Just this week, federal energy minister Josh Frydenberg has called on the Australian Energy Regulator to investigate claims electricity network companies are price-gouging customers to help cover their corporate tax liabilities.

That review complements action already taken by the federal government to fix the regulatory framework, including abolishing the Limited Merits Review regime, which allowed network businesses to increase electricity bills by around $6.5 billion through the appeals process.

The hidden truth about retailer discounts, says Ben-David, is that the roughly 50 per cent of consumers who don’t actively engage with the market, and thus stay on higher priced contracts, are used to subsidise the marketing and discount costs used to lure those customers seeking better deals.

As he described it to the Australian Energy Week conference in Melbourne last Friday, the less customers there are on the higher prices, the less funds are available for a retailer to effectively cross-subsidise, or transfer, funds for lower-priced customers.

So, as more people switch, the funds available for cross-subsidisation decrease, which drives a small increase in the price of (electricity retail) “standing offers,” a much bigger increase in the cost of discounted market contracts, and a decline in the size of discounts.

On top of that, he says, the cost of competition – the contribution that competition costs are making to a customer’s bill – is also increasing.

“So a retailer is becoming a bigger and bigger part of the bill with more people switching.

“So what this all means is we’re getting higher prices, lower discounts, narrower price dispersion, and increasing retailer costs, as the market becomes more competitive,” he said.

“This result is contrary to usual expectations about the impact of increased competition on retail markets. And that’s why my paper is called the unfortunate paradox of retail energy prices.

“And the paradox is this: policy makers and regulators, people like myself, feel compelled to encourage on default contracts to shop around – why should they be paying such high prices?

“There’s certainly a lot of effort going on here in Victoria and also through the national framework, to try and promote customers to switch more.

“And it certainly helps those customers (who) do switch to a lower price contract. But, it means that prices increase for all other customers. And especially, and ironically, customers on discounted offers,” he said.

“But, you know, that’s the paradox. We help a few, but a lot of others have to pay.”

So how does a regulator intervene in the market to fix a problem that, arguably, is the result of unintended consequences of earlier interventions?

Is this more evidence that governments and regulators should keep intervention to an absolute minimum?

No, says Ben-David. But he adds that any new interventions by the ESC or others should be judged by their ability to reduce competition costs.

“So either, reduce those costs, or reduce retailers’ ability to pass those costs on to customers,” he said.

“So if retailers want to incur those costs, and are prepared to wear them, that’s fine, but not to pass them on to customers.

“So I think some regulatory risk-taking is acceptable and I think it is necessary. And i think it may be the only way we have to discover the merit of different types of regulatory interventions in the retail energy market.”

By way of example, Ben-David points to the recent announcement by the Victorian government, on its Power Saving Bonus, where they offered to pay $50 to every customer to go and look at the government’s own comparative website on retailers.

“That encourages customers every six months, every 12 months, to just routinely go to the website and have a look an maybe switch if they can find a better deal,” he said.

“Then, it kinda says to the industry, well you know what, all your marketing doesn’t actually matter all that much any more, because really, customers are now coming to our trusted website, and that’s where they’re going to have a look, and really what they’re going to care about.

“So that encourages retailers to focus on managing their costs down, rather than just pursuing market by increased competition costs.”

He said the launch of consumer advocate Choice’s Transformer program, which also guides customers to switch to lower prices, could have a similar effect.

“What I think (these things) do, if they work, is they turn that cost curve down. And as it turns down, it drags down standing offers, or undiscounted offers … and it flattens out discounted offers, before bringing them down a little.

“It will certainly be big part of the work we do at the ESC, as we implement the Thwaites reforms and, indeed, modernise our regulatory framework.”

Meanwhile, the Australian Energy Market Commission has announced its own new measures to prevent energy discounting that leaves consumers worse off, with the introduction of a new rule.

AEMC  chair John Pierce said on Tuesday that preventing discounts off inflated base rates was another important way of protecting consumers and giving them more control over their energy bills.

“Discounting can work to benefit consumers as long as the details are properly disclosed,” he said. “But dodgy discounts deliberately designed to confuse consumers are not acceptable.”

“Confusion around retail price offerings also means most consumers don’t grasp the opportunities on offer.

“That’s why it’s important to have rule requests like these – so competition in the retail market delivers for consumers,” he said.  

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  • MaxG

    This simply highlights the ubiquitous stupidity in this country. First the privatisation, which was predictably only successful for the corporations; second the increased competition in a oligopolistic environment, which naturally leads to increased pricing for the consumer; and then the finding that prices overall have gone up due to too many leeches in the supply chain. And I am not even talking about the (failed) regulators…

    • Joe

      But Max, we have ‘the people’s champion’, the Pierce, now on our side. We can’t lose now… can we?

  • palmz

    For those of us in Vic ‘go and look at the government’s own comparative website on retailers.’ https://compare.switchon.vic.gov.au/welcome
    The more people doing this to switch the more competitive the public offers will be, as our retailers will know that this is the easiest way to gain customers.

    AND you can use your interval data (if you have been at the some house for 12 months) to ensure you get the best deal on offer.

    (You might be able to get a better deal outside of this but it is more work)

    • Stewart Rogers

      Yep… if you don’t have 12 months or aren’t in Victoria try wattever.com.au. Can save you a bucketload and has green ratings on each retailer which may be of use.

      • Greg Hudson

        I’m in Victoria, and had a look at Wattever.
        Comments:
        1. I had to sign up to use the comparison function (not required with the Vic Govt site)
        2. Their terms of Use (yes I actually read them) allow them to provide (which usually means ‘sell’) your name and email address to anyone they like, so they can then spam you (wattever claims ‘they’ won’t spam you though). This remains to be seen.
        3. Do not call register (this one is a beauty)… If you like phone spam:
        By submitting your telephone number to the Host, you give consent to be contacted by telephone on that number by either the Host or any of its associated Service Providers. Your consent will be either an express or deemed consent for the purposes of the Do Not Call Register Act 2006 (if it applies).

        IMO if you value you privacy, steer clear of WattEver and use the free Govt comparison site, which contains exactly the same information anyway (although it is slightly more difficult to use). See:
        https://compare.switchon.vic.gov.au/

        BTW, neither site displays cheapest pricing in a spreadsheet style format, making it extremely difficult to examine hundreds of plans.
        What we really need is a LIST sorted by price per kWh so we can see the true price. I ended up creating my own spreadsheet top 20 based on ‘switchon’ and using that instead.

  • Phil

    My head is spinning after reading this
    Yet another reason i’m glad i went off the grid 5 years ago
    Simple reliable cost effective “Off grid 101” versus predatory “Dodgy Business 101”

    And it’s across government and industry and what was once an essential service
    Consumers being preyed upon from so many angles can they survive?

  • Douglas Hynd

    ACT has substantially lower retail electricity prices than most states – and guess what it has a dominant retailer still substantially owned by the ACT Government without intense competition to switch providers

  • rob

    Noticed Today that the gen/retailers were at it again……….pushing up prices to the $300+ mark once for 5 minutes every half hour in NSW , Vic and poor old S.A. at $350! Absolute bastards the lot of them!