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.