Gerard Brody, CEO – Consumer Action Law Centre
This week it was reported that energy bills for an average Victorian household have skyrocketed to a shocking $3,655 a year. The ACCC confirms that residential electricity prices have increased 63 percent on top of inflation since 2007-08. As politicians quibble at the cost of coal versus renewable energy, there is one energy policy proposal that will put millions of dollars back into the pockets of households and small businesses. It’s called a Basic Service Offer, and would combat the excessive price gouging of the big energy retailers.
The Basic Service Offer was proposed by a recent independent and bipartisan review of Victoria’s retailer energy sector. The Basic Service Offer would be a ‘no frills’ product required to be offered by all retailers, priced at an amount set by an independent regulator, stripped of unnecessary additions and hefty profit margins. A well designed Basic Service Offer could save Victorians over $500 million annually. These savings would directly benefit those paying the highest energy prices and be a significant economic stimulus for the state.
The review, led by former state government ministers John Thwaites and Terry Mulder, found that it is the retail charge of the bill that is hitting Victorians hard. While concentration in the wholesale market and gold-plating of poles and wires have contributed to rising costs, the retail charge—the amount charged by the likes of Origin, AGL and Energy Australia for billing you—has now reached 30 percent of the total bill. This is up from 12 percent in 2007 and is much higher than in comparative states and countries. The Australian Energy Market Commission (AEMC) has similarly found that Victorian retailer margins are the highest in the nation.
When the state government deregulated retail energy pricing almost ten years ago, the promise was lower prices and better services. The theory was that new and incumbent retailers would compete to gain market share, be more responsive to customer needs and push prices down. After nine years, it’s time to admit that the experiment failed.
This is not to say that competition has failed completely, rather that the type of competition that has resulted from price deregulation has been ineffective and costly. It’s only benefited a subset of customers, rather than the entire community that rely on energy as an essential service.
A particular problem identified by the independent review is the amounts retailers spend on marketing and ‘customer acquisition’. These can be over 40 percent of retailers’ costs. The issue here is that rather than competing to offer the best service to customers, energy retailers have turned into marketing machines, competing on their ability to gain new customers and spending millions upon millions in doing so. We’ve all seen the billboards and advertisements which trumpet 30 or 40 percent off if you switch. However, it is existing and loyal customers that miss out and who are paying the cost of excessive marketing. Discounts generally only last a year, and unless the customer switches again, they can be paying up to $800 more per year for remaining loyal.
Blind faith in ‘shopping around’ as a solution has failed us. The unfortunate truth is that shopping around hasn’t left the community better off. Some benefit, but some people continue to be ripped off. That’s not fair in an essential service market.
A problem here is the conditions put on offers, for example, the requirement to pay on time to receive a discount. These conditions are really a penalty in disguise—paying a bill one day late can result in a loss of a discount worth $500. That’s a very large late payment penalty, and could mean you pay more than if you have never shopped around.
Such tricky practices foster disdain and a lack of trust in energy retailers. Many people think it is too hard to switch, or ‘they are all the same’. A survey conducted for the AEMC earlier this year confirmed these attitudes, finding that 64 percent of those surveyed were concerned about hidden fees and charges and half said that it’s too complicated to compare the various options and deals.
Other research conducted by the CSIRO for the independent review concluded that it’s quite reasonable for people not to be interested in shopping around. The researchers stated that people are ‘trapped’ in the energy market. They have to use energy, and whether they buy from one retailer or another does not change the product that they are purchasing.
The review panel picked up on this point in their report: it’s wrong to blame people for not being active in the market; suppliers should be vying to provide the best possible price and service for all customers.
A Basic Service Offer will drive better competition. Suppliers will still be able to discount if they are more efficient than other businesses. Discounts will be clearer and fairer because there will be a standard rate from which offers are discounted from.
In a market with a Basic Service Offer, suppliers will also be able to innovate and offer customers different arrangements, as they can now. For example, some people prefer to pay more for green power. Retailers can also offer different rates at different times, known as ‘time of use’. Or retailers could offer discounts for those willing to reduce consumption at periods of high demand, known as ‘demand response’. People will choose these products if they feel they are more suitable than the basic deal.
What will be different will be the availability of a safe, low-cost, default offer: the Basic Service Offer. People who don’t have the time or ability to consider all the options can be assured that they aren’t being gouged for an essential service. The Andrews Government should adopt the recommendations of the bipartisan review. This would bring major relief to Victorians struggling with energy costs and accountability to the businesses privileged to deliver us an essential service.
This piece is available for republishing.